The Chancellor was initially attracted by the idea of boosting private contributions to the arts through a new tax break but Treasury sources say he has now ruled it out on grounds of cost.
Officials advised him that it would be difficult to single out artistic charities for special treatment, and that the rule would have to be applied to other organisations with charitable status, leaving the Government liable for a huge bill.
The decision will further infuriate the Labour-supporting members of the arts establishment who have begun to express frustration with the Government's lack of commitment to culture.
Mr Smith had put the proposal for tax breaks forward as part of a strategy for boosting Britain's cultural life by generating money from rich benefactors and corporate donors. He was supported by Gerry Robinson, the chairman of the Arts Council, the Government's main cultural quango, who believes that it is essential to raise more money from the private sector.
Tax breaks on donations to the arts are already well-established in the United States, where credits are given to the donor rather than the recipient of the gift. Research for the Arts Council has estimated that changing the system in Britain would generate more than pounds 20m a year in extra funds.
And the American model suggests that the additional money would be cumulative, because allowing donors to keep the tax acts as an incentive to give. Under current tax rules, although donors can retrieve tax on some gifts, the extra money goes to the recipient rather than the donor.
Mr Brown, who is well known for being sympathetic to the arts, unveiled a number of measures, including tax breaks for the film industry, in his last Budget. However, he is understood to have ruled out any more boosts for cultural activities this year.Reuse content