Gordon Brown has ordered Alistair Darling to drop controversial plans to increase road tax for millions of motorists after a threatened backlash by Labour MPs.
Planned rises in vehicle excise duty for cars bought before 2001 will be scrapped in the pre-Budget report this autumn. Downing Street has ordered the Treasury into retreat after complaints that applying the tax rises retrospectively was unfair.
But Treasury insiders were left scratching their heads over how the Chancellor would find the money to pay for the U-turn, which could cost up to £500m.
The move is an attempt by the Prime Minister to show he is listening to families' concerns over the rising cost of living. But it could prompt accusations that Mr Brown has been forced to perform another U-turn to rescue his troubled leadership and try to reverse a downturn for Labour in the polls.
Mr Darling used his Budget in March to announce increases in vehicle excise duty for the most polluting cars. It later emerged that the rises would apply not only to new cars but to those with 1.5-litre engines or larger bought before 2001 – affecting 18 million drivers.
More than 40 Labour backbenchers, the Conservatives and motoring organisations protested that drivers of older cars should not be penalised. MPs were threatening to rebel against the Government in a Commons vote this week.
A Treasury spokeswoman said: "The Chancellor has met a lot of MPs and he is aware of their concerns. He will look at everything in the run-up to the pre-Budget report, but he has made no promises."
The shadow Treasury minister Justine Greening said: "If it is really the case, this is because the Government has been found with its fingers in people's pockets taking money out."Reuse content