There is one statistic that really hammers home how expensive the 10p U-turn is. About £2bn of the £2.7bn in compensation is going to those who had already won from the 2007 Budget. Officials insist this was the only simple and quick solution. But there was another way that was cheaper and more comprehensive.

Ian Mulheirn, chief economist at the Social Market Foundation and a former Treasury official, thinks he has the answer. He believes the chancellor could have compensated all those who lost out for just £1.5bn. By contrast, the chancellor’s plan was almost twice as expensive but only covered 80 per cent of the 10p rate losers.

The main downside would be losing any political benefits from the bung to middle England. Indeed, that may be the reason it was not pursued.

The alternative involves raising the income allowance by £1,100 and tapering (or gradually reducing) the additional allowance away as a person’s income reaches 19,000. Mr Mulheirn calculates this would fully compensate the 5.3m losers for 1.5bn in a targeted manner. There would be no additional benefit to those higher up the income scale. The main downside is that it makes the tax system more complicated (but so did raising the allowance mid-year).

The graph below shows how this proposal compares to what Mr Darling proposed yesterday. The effect of the 10p rate is in blue, Mr Darling’s proposal is marked in red, and Mr Mulheirn’s is in green. The green line is clearly fairer to the poor.  Was Gordon Brown was offered this solution? And did he decide against it?

In the end it took a face-to-face meeting between Gordon Brown and Frank Field last night to end the 10p revolt.

But if the government thinks it’s out of the woods, it should think again. Backbenchers are ready to use their newfound clout over other issues: the next big one being 42 days terror suspect detention without trial.

Not that the more left-wing Labour backbenchers are wholly convinced by today’s concessions:

Paul Flynn, MP for Newport West, tells me: “We’re saying we want to see issues that are recognisable as traditional Labour issues, we are now seeing the strength of the backbenchers, muscles have been flexed.” 

Dai Havard, MP for Merthyr Tydfil and Rhymney (pictured below), says Frank Field had capitulated too quickly without cast-iron guarantees: “My opinion is if we’d squeezed his balls we’d have had £1bn in writing by Monday,” he tells the FT.

The U-turn is already happening. Apparently Gordon Brown will - in Prime Ministers’ Questions at noon - announce compensation (backdated!) to those affected by the removal of the 10p tax rate.

Good news for poor workers.

Bad news for the government’s reputation: it’s the Treasury’s third U-turn in as many months.  

Expect David Cameron to have a field day in a few minutes’ time in the Commons.

Frank Field has now gathered 45 Labour names for his amendment to the finance bill - which would provide compensation to those hammered by the abolition of the 10p rate.

At this rate the rebel former minister looks increasingly likely to defeat the government.

This morning we wrongly wrote that - having claimed 39 names yesterday morning - the list was down to 31.

Simple explanation: Frank’s spokesman left a message on my phone last night with the wrong number. Today he apologised for confusing 31 (rebellion losing steam) with 41 (rebellion gathering steam). Ahem. We’ve all been there.

Gordon Brown is now under pressure to pull a more convincing rabbit out of his hat this week.

These are the MPs who joined the revolt overnight.

Kelvin Hopkins
Jim Hood
David Chaytor
Bob Marshall-Andrews
Rosemary McKenna
Hugh Bayley

Mark Durkan (SDLP)

It has taken a year for many Labour MPs to notice that the headline cut in income tax from 22p to 2op came at a cost - the abolition of the 10p band.

That seems pretty embarrassing. Bear in mind that the headlines - the day after the 2007 Budget - focussed on this sleight of hand.

No surprise then that one MP, at Monday night’s meeting of Labour backbenchers (the PLP) got his sums confused. It was wrong, argued the person (Tom Levitt apparently) that MPs would each be £1,000 better off while poor workers suffered. The sum was totally erroneous - being his application of the 2p cut to his entire salary. D’oh.

Meanwhile someone tells me that posters were made a few years back, declaring the greatest achievements of the Labour regime: among them the introduction of the 10p band. Apparently John Prescott still has the posters in his office. But is the 10p one still there?

One wag suggests that supplementing the 1 for a 2 would solve the problem.

Rightly MPs are worried that the issue is going to bite them at next week’s local elections. Apparently the Tories have already drawn up material showing how much worse off different types of workers are going to be.

Angela Smith MP. Never heard of her before. Maybe you have. Anyhow, apparently she is threatening to leave the government over the abolition of the 10p income tax bracket.

Given her relative anonymity* - feel free to disagree - this isn’t a massive blow to Gordon Brown.

It would have been more exciting if it was the other Angela Smith MP, who is Parliamentary private secretary to the prime minister.

Still it isn’t great news given the brewing backbench dissent over the issue.

(*She is/was pps to Yvette Cooper, chief secretary to the Treasury)

 UPDATE:

Smith has just told me: “No comment”. But she has told friends that she could be about to resign. Tomorrow seems likely.

LATEST UPDATE:

She has changed her mind. After a chat with the PM. Not the most impressive of rebellions.

It seems odd given what has happened since.

But a bill* published last year gave new powers to building societies to borrow more from the wholesale markets. That is, the ones which enabled Northern Rock to grow like topsy and then implode. The bill has increased the maximum wholesale borrowing level from 50 per cent to 75 per cent.  

Luckily, the timing means few if any building societies will have taken advantage of this new freedom. Even if they wanted to - unlikely given the Rock disaster - the credit markets have been frozen.

The purpose of the change was to place building societies on a level playing field with banks. In theory this could help create more long-term (25-year) fixed mortgages, something which Gordon Brown is keen on.

Lord Davies of Oldham, deputy chief whip in the Lords, told a debate in October that “in the light of recent events in wider financial markets, we will want to consider carefully whether such a power should be used.”

Later he added:

“The concentration of funding will also pose risks that need to be effectively managed by firms. The recent case of Northern Rock is a clear example of the importance of risk management in this regard.”

Just when the government should have been worried about the growing credit bubble they were taking steps to encourage building societies - Britain’s most prudent lenders - to loosen up. Bizarre in retrospect.  

   * Building societies [funding] and Mutual Societies (Transfers) Bill

It’s a question worth asking of the Treasury spokesman for the Liberal Democrats after his claim yesterday that 3m families could end up in negative equity within a year. (It’s the front page of the Daily Mail today).

The prediction came within an otherwise timely debate yesterday, prompted by the Lib Dems (see yesterday’s blog) about the state of the economy.

Cable’s analysis was based on the very feasible theory that house prices could fall by 10 per cent over the year. But then his logic went haywire.

“There are currently three million families - three million - who have loan-to-value ratios of properties in excess of 90 per cent, the Council for Mortgage Lenders confirms that.

“If the numbers I have been describing, a 10 per cent fall over a year, are to materialise, all of those families, by definition, will find themselves in negative equity within a year, and many are now doing so.”

The problem with Vince’s logis is that many of those 3m households bought years ago and have an equity cushion which could run into the tens or hundreds of thousands of pounds. His logic only applies to those who bought right at the top of the cycle.

Incidentally, the Council of Mortgage Lenders tells me this morning that it disagrees with the 3m figure. It thinks the real figure would be rather lower. The CML also points out that Cable is presuming that home owners have not paid off any of their debt since taking out a mortgage.

After months in which Cable has proven himself as a sharp Parliamentary operator - he excelled over Northern Rock - this seems a big mistake.

What to make of Alistair Darling and his sunny forecasts? It takes an exceptional orator to combine such dour delivery with such optimistic content.

Last time I looked, the stock market had collapsed by about 15 per cent, house prices had fallen four months in a row and mortgage applications had slumped.

But the Chancellor of the Exchequer still takes a rose-tinted view of how things are going. To hear him in his first Budget today, it was almost as if he was discussing another country; and I don’t mean Scotland.

“Uniquely placed to succeed in the global economy,” he droned. “Better placed than any other global economy….pre-eminent world financial centre…”

You could be forgiven for thinking that Great Britain was a fortress and every other country - in the US, Europe, Asia - were mere sandcastles, reduced to nothing by a few sub-prime waves.

Page 149 of the Red Book has more of this: “Box 4: Resilience of the UK economy” describes the ”improved resilience” of Britain and how it survived the Asian crisis of 1997, the Russian debt crisis of 1998, the terrorist attacks of 9/11, etc (all of which happened to other countries).

“The UK (was) estimated to have been the most resilient of the economies studied in the latter period (of 1994-2005),” it said.

Mocking Mr Darling’s confidence may be dangerous, given that the Treasury has beaten most economic forecasters since Labour came to power in 1997.

 But why the apparent complacency about the UK housing market, where plenty of “sub-prime” lending has been going on unchecked in recent years?

Another weighty document published today by the Treasury - “Housing Finance Review: analysis and proposals” - makes for a rather serious read. Though lacking in sensationalism, it spells out the consequences of the credit crunch for Britain’s mortgage market. Answer: very bad.

Page 61 has an illuminating chart which shows typical lending rates in different countries around the world. Loan to value ratios range from 55 per cent in Italy, 67 per cent in France and 65 per cent in Canada to - at the most extreme - 80 per cent in two countries.

Can you guess which?

 The US (where falling house prices have sparked a global panic). And the UK.

 The small print of the Red Book does have a few signals about what the government really thinks. It expects revenues from stamp duty, capital gains and inheritance tax all in the next financial year, partly thanks to “sluggish or flat house price growth”. The fact that it is lifting its borrowing targets is another clue.

Here is are some snippets from the budget documents. I’ll start with the bad news.

- Falling share prices will hit capital gains receipts in 2009 by an undisclosed amount. Inheritance tax receipts are also likely to be “adversely effected”

- Stamp duties are expected to be £800m below forecast because of weakness in the housing sector. In 2008-09, receipts are expected to fall by 6 per cent as the country goes through a period of “sluggish or flat house price growth”

- They expect a further “near-term” decline in commercial property prices (which have already fallen by more than 10 per cent in the last year)

- Investment in homebuilding is expected to be flat in 2008

- The Treasury are able to write an entire box on Financial Sector Performance without once mentioning Northern Rock

And here’s the good news (if you believe the Treasury)

- The budget forecasts are based on the assumption that the credit squeeze will ease in the second half of this year and “normalise” by the middle of 2009

- Don’t panic, there is a rebound coming: “With the economy picking up in 2009 as financial markets normalise, a rebound in residential transactions and an upturn in commercial property is projected.”

- And who said falling property prices would hit consumption? “Strong recent labour market performance means that conditions are in place for house prices to slow without a significant negative impact on consumption.”