Gordon Brown was warned by one of his closest advisers against scrapping the 10p tax rate before the 2007 Budget, The Times has learnt.

Spencer Livermore, chief political and strategy adviser to Mr Brown at the Treasury, feared a public reaction against the change because it increased taxes on some on low pay.

Mr Brown overruled him, telling Mr Livermore that he understood the politics surrounding the issue better, according to an account of the exchange relayed to The Times.

Mr Livermore’s warnings are significant because until recently Mr Brown refused repeatedly to acknowledge that anyone would lose out. He has never admitted that the decision to scrap the 10p rate in his final Budget was a mistake and has only conceded errors in its handling.

Lord Soley, a former chairman of the Parliamentary Labour Party, acknowledged yesterday that the emergency tax handout would damage Mr Brown’s reputation for economic competence. This would be forgotten, however, if he led the country out of financial turbulence, he said.

Today’s disclosure suggests that Mr Brown overruled warnings about scrapping the 10p rate because he wanted to use the money saved for the reduction in the basic rate to 20p.

Mr Livermore refused to comment on his exchange with Mr Brown yesterday. “Advice given in private should stay in private,” he told The Times.

Mr Livermore moved to No 10 last summer with Mr Brown, and last autumn advised him to go to the polls to secure reelection. He left 10 Downing Street earlier this year and now works in advertising.

Alistair Darling made no attempt to hide the political motives behind the £2.7 billion emergency compensation package yesterday.

“Economics and politics are inextricably linked. I don’t dispute that for one moment,” he said.

The Chancellor insisted that he had not rewritten the Budget but recognised that “we did not do enough”. He aded: “This whole business over the 10 pence is something we could have handled better. What I announced means we still meet our fiscal rules but support the economy when it needs to be supported.”

Experts say, however, that the decision to borrow £2.7 billion to fund the tax U-turn threatens to compromise the Government’s financial credibility.

It admitted in March that it was going to come very close to breaching its own rule on borrowing by 2010, and economists say that its latest move could worsen the problem.

The sustainable investment rule says that borrowing should not exceed 40 per cent of GDP. This year the Government predicts that its borrowing will be 38.5 per cent of GDP. But it said this total would rise to 39.8 per cent by 2010-2011, only £2.8 billion away from the 40 per cent barrier.

Stuart Adam, senior research economist at the Institute of Fiscal Studies, said: “Even if the Government’s announcement is a one-off, it is sailing perilously close to what the fiscal rules allow. The reason why the fiscal rules are so important is partly because the Government made a big play of them. The credibility of the Government’s fiscal policy would be under question if it broke its own rules.”