Gordon Brown suffered a wounding double blow to his authority as he abandoned moves to sell a stake in Royal Mail and was defeated by Labour rebels over plans to clean up the Commons after the expenses scandal.
The fresh setbacks came after he endured bruising clashes with David Cameron over spending plans and faced ridicule from Tory MPs after he spoke of a “zero per cent rise” in budgets.
The retreat over part-privatisation of the Royal Mail was blamed by Lord Mandelson, the Business Secretary, on the struggle to attract buyers in the recession. But the opposition parties claimed the climbdown had been forced by the growing opposition to the sale among Labour MPs and trade unions.
It came a day after Alan Johnson, the new Home Secretary, watered down the Government’s plans for identity cards and a fortnight after Mr Brown performed a U-turn over holding the Iraq war inquiry in public.
Had ministers pressed ahead with the Royal Mail part-privatisation, which was opposed by more than 140 Labour backbenchers, they would have been forced to rely on Tory support to get the measure through the Commons.
The announcement was a personal embarrassment for Lord Mandelson, who had argued the sale was essential to revive the fortunes of the troubled business and tackle its crippling deficit pension scheme deficit.
Although he had repeatedly warned that the issue could not be ducked, he finally scrapped attempts to sell the stake in a brief statement to peers.
He said: “We have thoroughly tested the market to see who is interested in partnership, but economic circumstances, I need hardly point out, are extremely difficult.
“I have always been clear we would only do a deal with the private sector if it represented value for money for the taxpayer.”
Lord Mandelson insisted he would revive the sale when market conditions improved, but his move effectively killed off the prospect of part-privatisation before the general election expected in the spring.
Only one potential buyer, the private equity group CVC Partners, had made a formal bid for the Royal Mail stake. It is thought to have offered about £1.9 billion for a 30 per cent share in the business.
Kenneth Clarke, the shadow Business Secretary, said: “This Government is in a state of paralysed indecision on every difficult issue.”
John Thurso, the Liberal Democrat business spokesman, said: “Gordon Brown no longer has the political will to fight the unions and opponents on his own backbenches.”
A source close to Lord Mandelson conceded the Royal Mail sale had always been controversial. He added: “The difficulty around the bidding process makes it even more so. It would be time-consuming and would completely dominate the Government’s political agenda over the summer when we knew we would be unable to implement it in the immediate future.”
Two hours after the announcement, the Government suffered a surprise defeat to the Parliamentary Standards Bill, which had been rapidly drawn up in an effort to rebuild the reputation of the Commons.
By a majority of three, MPs defeated a clause that would have allowed Parliamentary debates to be used in court as evidence. Malcolm Jack, the Commons clerk, had warned that the move would have had a “chilling effect” on MPs’ freedom of speech.
Former Cabinet ministers John Reid and Margaret Beckett were among 25 Labour backbenchers to rebel against the Government.
Jack Straw, the Justice Secretary, said he would “respect” the result.
It was Mr Brown’s second major Commons reverse as Prime Minister after his defeat in April over residency rights for Gurkha war veterans.