It was the moment when Gordon Brown risked losing his party — and his job. “There aren’t any losers,” the Prime Minister said, dismissing out of hand an MP, Eric Martlew, who asked how many would lose out as a result of the scrapping of the 10p tax rate.

Alistair Darling, sitting next to Mr Brown at the meeting of the Parliamentary Labour Party on Monday, March 31, knew immediately that the Prime Minister was wrong. In reality there were 5.3 million losers, a fact that the Treasury had confirmed.

From that moment Mr Brown’s fortunes sank so fast and so violently that even his closest allies began to wonder whether, for the good of Labour and the country, he should stand aside.

From initial outright denial, to grudging acceptance of a few minor issues, to vague promises of redress later, to pledges of immediate compensation, to yesterday’s £2.7 billion handout, the story of the past five weeks has been one of mounting panic.

Initially, Mr Brown and Mr Darling struggled to maintain a united front as the 10p tax rebellion flared up in mid-April. The Chancellor, knowing that it was a serious issue, appeared at odds with the Prime Minister, who still tried to pretend that it was not.

It is easy to see how Mr Brown, who had abolished the 10p rate in his final Budget as a Chancellor, felt uncomfortable admitting that there was a problem. He had founded his political reputation on attempts to lift people out of poverty and yet had raised taxes on some of the lowest paid.

Accustomed to being Labour’s moral champion, he became angry when accused of increasing the burden on the poor to finance a tax-break for the middle-class.

Faced with a Commons revolt three days before the local elections, Mr Brown finally accepted that there was an issue. Frank Field, the only MP to point out the 10p flaw when it was introduced last year, was promised that losers would be compensated.

It was only after Labour’s local election mauling that the true damage of the 10p tax row finally sank in at 10 Downing Street. Although Mr Brown’s allies blame former supporters of Tony Blair for stoking the row, they realised that recrimination and revenge were luxuries. Urgent — and dramatic — action was needed if Mr Brown were to save his premiership. “The political dynamic changed after the locals,” said one figure closely involved.

Mr Darling had considered mitigating the 10p tax decision as he prepared for his first Budget in March. But Treasury officials examining a mix of backdated tax credits and tax rebates said that it would be expensive, inefficient and administratively complex. The one simple solution — to raise tax thresholds — was judged prohibitively expensive at that time.

Returning to the issue, Mr Darling was faced with the same unappetising choice: a rag-bag of measures that would almost certainly fail to appease the rebels or an expensive but simple tax handout.

At No 10, Mr Brown’s most senior civil servant was quietly pressing the second solution. Jeremy Heywood shared Mr Darling’s fears over the alternative. Backdating tax credits was all but impossible and tax rebates would present an administrative nightmare and could not, in any case, be offered ahead of time.

The appeal of a tax handout was, moreover, increased by clear evidence that families are beginning to feel the pinch of rising fuel and utility costs in their finances. Gordon Brown, shocked by the local election results, finally agreed to the drastic measure about a week ago.

Ed Balls, his closest ally, foreshadowed the decision in an impromptu briefing with journalists in Westminster. Labour, he said, had “got behind the curve” on family finances and needed to do something “quickly”.

With the Tories seeking to make the Crewe & Nantwich by-election a referendum on the 10p tax issue it is tempting to see why Mr Darling made his announcement yesterday. The Chancellor’s aides insist, however, that it was parliamentary timetabling that was the stimulus for action. Mr Darling wanted to ensure that the raised allowances be included in the Finance Bill so that it could come into force this September.

Treasury insiders insist that it was Mr Darling who decided to raise tax allowances and deny any suggestions that the solution was forced upon him by No 10.

They say that the Prime Minister accepted in principle the need for radical action and that the two men had worked together to finalise the detail.

The decision to proceed was taken after efforts were made to ensure that it was watertight.

After seeing so many other of his measures unravel, for example his capital gains tax reforms, Mr Darling was emphatic that the measures be minutely examined.

In a sign of frayed nerves, Mr Balls also lashed out at Mr Field, suggesting that he was a loner acting dishonourably. Having won a comprehensive victory over Mr Brown, Mr Field had predicted on Monday that the Prime Minister would not lead Labour into the next election.

Already ministers are playing down expectations that the measure will be enough to save Labour from defeat in Crewe. Instead, they suggest that its success can only be judged in a year’s time.

In truth, however, it is inevitable that the poll on May 22 will decide whether the £2.7 billion tax handout has been enough to arrest the decline. “If we lose Crewe then I think a few of us will be telling him to think about quitting,” a former minister and friend of Mr Brown told The Times.

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