Plans to axe new laws that would increase costs for businesses, including enhanced maternity leave and tougher equality legislation, are threatening to blow open a Cabinet rift over how Labour should respond to the economic downturn, The Times has learnt.

The proposals, outlined in the Queen’s Speech just two months ago, and championed by Harriet Harman, the deputy Labour leader, are at risk after Lord Mandelson, the Business Secretary, and the Chancellor called for a moratorium on any measures that would add to the current financial pressure on businesses. Right-to-roam legislation and powers to allow councils to ban alcohol promotions are also under threat as the Government prepares to gut its legislative programme in the face of the recession.

Lord Mandelson’s attempt to purge antibusiness measures comes after a meeting of the Economic Development ministerial committee last week. In a confidential memo ministers have been asked to “advise on a moratorium on legislation and legislative announcements made but not yet implemented that will entail additional costs for businesses”.

Senior figures say many of the policies targeted are those promoted by Ms Harman, who has argued Labour should take a harder line on those to blame for the financial crisis and do more to protect its victims. Last night one of her allies warned that the memo exposed a “deepening ideological divide” within Labour over its reaction to the downturn. Sources close to Lord Mandelson defended the move to stop the new laws. saying that proposals to enhance maternity leave were almost certain to be scrapped, as were new measures to ensure that government contracts were awarded to firms with good records on equality.

Some regulations, such as a ban on cigarette displays in small shops, have already been delayed. But tighter regulation of the financial services industry would not be included in the moratorium, allies of Lord Mandelson said.

News of the legislative cull came as Gordon Brown prepared the ground for a third banking bail-out to be announced this week. Tomorrow Northern Rock, the wholly state-owned bank, will be given permission to reenter the mortgage market with loans of up to £14 billion over the next two years. On Wednesday Alistair Darling will authorise the Bank of England to begin buying up bank debt and increase the money supply. The next day he hopes to launch a new state-backed insurance scheme for banks’ toxic assets, but negotiations over both price and conditions between banks and the Treasury seem destined to go to the wire and the move could be delayed.

Speaking in Berlin at a meeting to prepare for the G20 in London in April, Mr Brown said: “We are are looking at how, working with all continents, we can ensure the best means by which the banking system can serve the public . . . rather than speculators with people’s money.”

Jon Cruddas, an influential left-wing Labour MP, warned last night that the Government was split over how to deal with the downturn. He said: “If the most progressive of our policies are the first to go under the hatchet, that will cause deep unease across the party. Genuflecting to the free market got us into this mess and the solution is not more of the same. There is now a deepening ideological divide about what to do next.”

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