Work and pensions ministers spent their Sundays beating an embarrassing retreat from plans to charge interest of up to 27 per cent on crisis payments to some of Britain's poorest families.
The Government faced fury from across the political spectrum after it emerged that it was planning to treat emergency loans from the Social Fund on a commercial basis.
The fund provides more than £500m a year to the worst-off – many of them elderly or disabled – for essential items such as cookers, basic furniture and children's shoes. The money is lent interest-free and deducted from benefits.
But the Department for Work and Pensions has been considering plans for credit unions to take over the loans and charge interest of up to 2 per cent a month – equivalent to 26.8 APR.
The moves were disclosed in a consultation document published by the Department for Work and Pensions and signed by the Work and Pensions Secretary James Purnell, which said interest would be charged "at affordable rates compared to those charged by commercial lenders in the same market". It said the cost of an average loan of £433.30 would rise by £47.80 and take four more weeks to pay off.
Lord Kinnock, the former Labour leader, led criticism of the move, saying: "There is no point in doing it, let alone no justice in doing it."
Labour backbenchers denounced the proposal and the Conservatives accused Mr Purnell and Gordon Brown, of "reinventing themselves as loan sharks".
Consultation on the document is due to end tomorrow.
Within hours of the storm erupting, Kitty Ussher, the Work and Pensions minister, said the Government would not press ahead with the scheme and blamed the controversy on a poorly worded passage in the consultation document. She confirmed that ministers were considering involving credit unions in distributing the loans but stressed they would not be allowed to charge interest on crisis payments from the taxpayer.
Ms Ussher said her department was looking for ways of making credit more easily available so vulnerable people did not fall into the clutches of loan sharks lending cash at rates of up to 1,000 per cent.
"We are absolutely not proposing to charge interest on Social Fund loans. I think that would be the wrong thing to do," she told the BBC. "We do propose expanding the way crisis loans work, to make them more available to more people, but we are not proposing charging interest. I think the confusion has arisen because one of the things we want to do is explore partnership working with great organisations which in local communities do give affordable credit, such as credit unions."
She indicated that the Government was looking at ways of easing the Social Fund's strict rules to allow the worst-off to qualify for a wider range of items, such as Christmas presents.
The price of a loan
Interest charged on the Government's Social Fund loans
Proposed interest on the loans if credit unions were to take them on
Interest charged by loan shark Mark Johnson of Birmingham, jailed for three years in 2005