Osborne loses nerve on plan to cut 50p tax rate

George Osborne argued the UK had not suffered the same wobbles as Italy, Spain and France because the Government had the markets' confidence (REUTERS)

An early cut in the 50p top rate of income tax has been ruled out by the Government until 2013 at the earliest, amid fears that the move would provoke public anger.

Ministers swiftly rejected a demand from senior economists to breathe life into Britain's faltering recovery by easing the tax burden on top earners. However, divisions were opening yesterday between the Tory and Liberal Democrat coalition partners over the merits of the step.

While many Conservatives believe a reduction would be crucial for encouraging entrepreneurship, the Liberal Democrat president, Tim Farron, denounced the proposal as "phenomenally immoral". i disclosed last month that David Cameron and Chancellor George Osborne are discussing plans to cut the top rate to 45p or 40p after being warned that it is generating only marginal returns for the Exchequer.

Calls for a cut were given fresh impetus after 20 high-profile economists demanded a cut at the "earliest opportunity", arguing that it deters business chiefs from investing in Britain. Downing Street reiterated yesterday that the 50p rate, which was levied by the last Labour government on salaries over £150,000, was a "temporary measure".

It also pointed to last year's coalition agreement, which said the Government's priority on taxation was to increase the personal allowance to £10,000 – a step designed to benefit low and average earners. Tory Government sources said a reduction in the 50p top rate might make sense economically, but is currently politically impossible.

Eric Pickles, the Communities Secretary, said the rate "isn't actually contributing very much" and "on balance is probably doing more damage than good". But he acknowledged there was no prospect of abolishing the rate immediately. He said: "When the Chancellor judges the time right to do so, then we should get rid of it."

Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, struck a very different note. He said: "At a time when the whole country is facing serious financial challenges, the priority needs to be people on low and middle incomes."

The impact of the new rate is being studied by HM Revenue and Customs, which is not due to present even preliminary conclusions to Mr Osborne until early next year.