Alex Salmond stood accused of the most humiliating U-turn of the devolution era after the Scottish Government yesterday ditched its pledge to replace the council tax with a local income tax.

Finance Secretary John Swinney blamed the economic downturn, Westminster cuts and Holyrood arithmetic, but Labour called it "the most humiliating climb-down since devolution" and evidence of a "government in meltdown".

Mr Swinney told the Scottish Parliament the government would not be proceeding with its plan to introduce a Local Income Tax before the next election in 2011. Instead, he railed against the Treasury and plans for £500m of cuts, and attacked Labour and the Conservatives for being opposed to the plan.

Before the election in May 2007, First Minister, Alex Salmond and senior SNP politicians toured the country promoting their promise that an SNP government would scrap the "unfair" and "hated" council tax.

However, after a defeat in parliament on the issue last year and their failure to pass their budget last month at the first attempt, John Swinney has been forced to admit delivering the policy in this parliament will be impossible.

Instead of a bill per household, a local income tax at 3p in the pound would have been levied and allocated to councils. However, it faced a number of hurdles. Westminsiter said it would result in the loss of council tax benefit to Scotland of £400m a year; Inland Revenue said it would not necessarily collect the tax; and it was criticised for allowing well- off people who live off investments, but have no earned income, to be exempt.

Opposition parties seized on the announcement as evidence SNP promises were beginning to unravel, given that if followed a ministerial reshuffle.

Iain Gray, Labour leader, said: "This is the biggest and most humiliating climbdown since devolution began. They really now have none of their significant policies that they took to the electorate intact. This is a government in meltdown."

The Liberal Democrats who were in favour of a local income tax, but want individual councils to be able to set their own rates, were outraged by the change. Finance spokesman, Jeremy Purvis, said: "This is a gross betrayal of the people who voted for the SNP."

But Annabel Goldie, Conservative leader, said: "We are relieved the SNP government has finally seen sense, realised it has lost the argument and ditched this tax on work."

Last night, a spokesman for the First Minister said: "The louder the opposition parties shout, the clearer it is that we have shot their fox on local tax. Westminster wants to raid Scotland's Budget by a billion pounds at the very time we had planned to introduce LIT - and it was abundantly clear that Labour and the Tories would have ganged up at Holyrood to vote it down."

Organisations outside parliament welcomed the change. Liz Cameron, chief executive of Scottish Chambers of Commerce, said: "At a time when the Bank of England has made clear the severity of the recession we are facing in the United Kingdom, the last thing businesses needed was a continued threat of increased business costs through the imposition of a Local Income Tax."

Steven Purcell, leader of Glasgow City Council, said: "The plans for a Local Income Tax would have had dire consequences for the city's economy."

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