Tony Blair and Gordon Brown are back-pedalling on suggestions that taxes might be increased to boost spending on the National Health Service.
The Prime Minister and Chancellor want to dispel the impression that a tax rise is imminent, amid fears that the public would see the move as a return to the "tax and spend" policies of Old Labour.
Their allies say any increases could be some years away and insist that the Government will not "take risks" with the economy when growth has slowed.
A fierce debate has broken out in Labour circles since the Chancellor hinted in his pre-Budget report in November that taxes might increase. But government sources claim the prospect has been "overplayed" by the media.
One source said: "If taxes rise – and it is still a big if – it would only happen if it was right for the economy. It would be for a specific purpose on public services. We are not going to just think of a number for the sake of it."
It is believed that Mr Brown will seek other ways of raising revenue without resorting to raising income tax. He has promised not to break Labour's pledge at last year's general election not to raise tax rates. Although the pledge expires at the next election, an increase in highly visible tax rates is seen as a last resort, and a rise in national insurance payments by employees is more likely.
Yesterday, two advisers to Mr Blair clashed over whether the Government needs to impose big tax rises to meet its promises to improve public services. Professor Tony Giddens, an important architect of Mr Blair's "Third Way" philosophy, warned in a book published yesterday that the Government must not return to the "tax and spend" policy of previous Labour administrations.
He told a seminar it was "not true", as some on the left had claimed, that some public services in the UK were worse than in other countries simply because the level of taxation was lower. A good deal of the problem was due to Britain's poor economic performance over 30 years, he said.
Professor Giddens, the director of the London School of Economics (LSE), said: "That is why it is crucial to renew the New Labour project and not simply to lapse back into the old one." He warned that tax increases could jeopardise the healthy economy, which had been a huge achievement for the Blair government.
But Michael Jacobs, the general secretary of the Fabian Society and an adviser to Mr Blair on "green" issues, told the seminar: "We need to find new ways of tax and spend. If we ignore the crucial importance of that issue we will fail in our principal goal of reviving the left of centre and public services."
He welcomed the debate over tax, but admitted that those such as him who favoured tax rises had not won the argument. He said the public wanted to know the money would be spent well and that taxes could not suddenly be raised without upsetting people.
The former cabinet minister Peter Mandelson, who chaired the meeting at the LSE, said New Labour was entering a crucial "third phase" in which "a more confident and more progressive" Government secured the lasting change the country needed. The first phase was between 1994, when Mr Blair became Labour leader, and 1997, with the second phase covering his first term in power.
Mr Mandelson said: "Political projects need to renew themselves constantly if they are going to retain purpose and momentum. Stop renewing yourself and you will stand still, but not for long, because you then start to move backwards. This is a law Labour needs to understand and apply."
Professor Giddens' book Where Now for New Labour?, extracts of which were published in The Independent this week, is published jointly by the Fabian Society, Policy Network and Polity.Reuse content