Alistair Darling cut taxes yesterday for 22 million people to make good the losses of only 4 million in the biggest financial and political U-turn of modern times.

The Chancellor borrowed £2.7 billion to give those on low and middle incomes an extra £120 this year in a desperate move to end the row over the abolition of the 10p rate that has brought Labour to its knees and left Gordon Brown fighting to survive.

The emergency mini-Budget was forced on Mr Darling by the need to avoid Commons defeat on his Finance Bill.

It is the first time in living memory that income tax has changed within a financial year, and it has happened only two months after the Budget.

Analysts pointed out that the further increase in borrowing would have to be paid for eventually by higher taxes or cuts in spending.

It came on a day when government fears that a housing crash may be on the way were laid bare by a ministerial blunder. Caroline Flint, the Housing Minister, walked into a Cabinet meeting with a briefing paper clearly visible and stating that “at best” housing prices this year will fall by 5 to 10 per cent.

Meanwhile, latest figures put inflation at a much higher than expected 3 per cent, dousing hopes of an interest-rate cut next month.

Despite Mr Darling’s moves, more than one million of Britain’s poorest paid will still lose out from the abolition of the 10p rate, although their losses have been at least halved and they have been promised more help later this year.

The Treasury put their average losses at about £50, but experts say that the 20 per cent of people who still are not fully compensated will be the ones who were hardest hit

in the first place — those earning just over £8,000. They lost close to £230 when the 10 per cent rate was abolished and will only benefit by £120 from this package.

George Osborne, the Shadow Chancellor, claimed that Mr Darling had been humiliated into coming to the Commons with “a mini-Budget to clear up the mess made by the Prime Minister in his last Budget as Chancellor”.

He added: “Let no one be fooled why he is making this statement today — not because he wanted to . . . but because this divided, dithering and disintegrating Government are panicking in the face of the Crewe & Nantwich by-election.”

After weeks of considering measures targeted specifically at those who were losing out, Mr Darling, urged on by Mr Brown and other senior ministers, went for broke and raised allowances for all basic rate payers by £600.

It means that anyone earning up to £40,835, the higher rate threshold, will gain £120 this year. The level at which people pay the higher rate of tax will be reduced to prevent higher rate taxpayers gaining.

All basic rate taxpayers will gain and even the 150,000 moving into the higher rate as a result of yesterday’s changes will be up to £120 better off.

The money will be forthcoming through a £60 lump sum in September pay packets, followed by £10 a month extra until the end of the year. The gainers include 17 million basic rate taxpayers who did not lose out at all from the loss of the 10p band. Some 600,000 people on low incomes will be taken out of income tax altogether.

The scale of Mr Darling’s climb-down stunned the Commons even though it was designed to deal with this year’s problems. He will have to come back in the autumn with long-term solutions to the problems thrown up by the 10p rate abolition.

The package killed at a stroke any chance of a revolt by backbench Labour MPs. Mr Darling presented it as a “family tax cut” to help those on low and middle incomes.

Whether it will stave of defeat for Labour in next week’s Crewe & Nant-wich by-election appeared unlikely.

In the Commons, Frank Field, who led the 10p rebellion, gave an unreserved apology to Mr Brown for making a personal attack on him on Sunday. Mr Field said that it should “put an end to this issue.”

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