George Osborne loses nerve on plan to cut 50p tax rate

Ministers have ruled out such a change until at least 2013. HMRC is due to report on the impact of the 50p rate next year

The Chancellor, George Osborne (EPA)

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.

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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 "immoral".

The Independent disclosed last month that David Cameron and the Chancellor, George Osborne, are discussing plans to cut the top rate to 45p or 40p after being told that it is generating only marginal returns for the Exchequer. Calls for a cut were given fresh impetus after 20 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 would be politically impossible at the moment. Eric Pickles, the Communities Secretary, said yesterday there was a strong case 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.

Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, struck a 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. Critics say it could be raising less than half of the £2.7bn a year forecast by the previous Chancellor, Alistair Darling. Others go further and argue it presents such a deterrent to wealth creation that it could even be counter-productive.

In their letter to the Financial Times, the economists said they feared the 50p rate was "doing lasting damage to the UK economy". They said: "It gives the UK one of the highest personal tax regimes in the industrialised world, making it less competitive internationally and making us less attractive as a destination for both foreign investment and talented workers."

They were supported by the former Tory cabinet minister John Redwood, who said: "The sooner [George Osborne] scraps it, the sooner he's got another building block in what he needs, which is a faster and better growth strategy."

The shadow Chancellor, Ed Balls, said: "Millions of struggling families and pensioners on middle and low incomes will wonder why the only [Labour] tax rise or spending cut George Osborne is willing to reconsider is the top rate of tax for the very richest.

"If we really are all in this together then the right priority to boost the stalled economy now should be temporarily reversing the VAT rise, which is costing families around £450 a year."

Brendan Barber, the TUC general secretary, said: "At a time when cuts are biting hard and ordinary people are suffering the biggest squeeze on their living standards in years, the last thing we need is a handout to the wealthiest in our society."