Rebel Conservative MPs are threatening to defeat the Government's plan to withdraw child benefit from higher-rate taxpayers.
Yesterday they rejected a compromise plan floated by George Osborne and urged him to abandon his policy. Worryingly for the Chancellor, they threatened to join forces with Labour in an attempt to block the cut, which is due to take effect in January.
Under Mr Osborne's original plan, families were due to lose their child benefit if one earner pays the 40p rate of tax, which will bite on annual incomes at £42,475 from April. Under his compromise, the threshold would be raised to about £50,000.
But Tory rebels warned that the revised plan would not remove the "cliff edge" under which the benefit would be withdrawn. They said it would not tackle the unfairness of a family with two earners both on £49,000 keeping the benefit while one with a single earner on £51,000 would lose theirs.
Whitehall insiders said Mr Osborne is now involved in a frantic search for other ways to soften the blow and placate Tories worried that the cut would hit their natural middle-class supporters. But time is running out because he wants to announce his concessions in his Budget two weeks tomorrow.
Other options being considered by the Treasury include:
* Higher-rate taxpayers keeping their child benefit until the child reaches the age of five
* Higher-rate taxpayers losing only half of their child benefit
* Raising the cut-off point, perhaps to £75,000 or £80,000
* Phasing in the cut to soften the blow for the losers and clawing back child benefit as people's incomes rise.
Mr Osborne wants to avoid means-testing, which would be seen as an extension of Gordon Brown's flagship tax credits. The advantage of his original plan was that it was simple, while any changes would make it more complex. Cabinet ministers are adamant that they will not ditch the policy. The Treasury wants to preserve as much of the £2.5 billion savings as possible and both Tory and Liberal Democrat ministers see the move as a way of ensuring people from all sections of society "take a hit" from their spending cuts.
But Mr Osborne is now under pressure to make bigger concessions. In the Commons last night, Labour called for a review of the proposal, warning that a single-earner family on £43,000 with three children would be £2,450 a year worse off.
Stewart Jackson, a Tory backbencher, warned: "If Labour votes against it, the Government will be defeated as it presently stands."
Last night Labour claimed ministers were "in total disarray". Nick Clegg, the Deputy Prime Minister, admitted that a re-think is underway ahead of the Budget. But Kenneth Clarke, the Justice Secretary, told ITV News that it was "ridiculous" to suggest the Government would do a U-turn.