Can it get any worse, Gordon?

GORDON Brown's troubled premiership hit its biggest crisis to date yesterday, with the resignation of a Cabinet minister and a humiliating climbdown over capital-gains tax.

Peter Hain, who held the dual roles of Work and Pensions and Wales Secretary, quit after police were called in to investigate whether he deliberately concealed donations of £103,000.

The resignation of a Cabinet minister only seven months into his time in No 10 is a major blow to Mr Brown, coming on top of Northern Rock, the lost data discs and last autumn's election that never was.

But equally damaging for a party that has based its success on economic competence was an announcement by Alistair Darling, the Chancellor, that he would U-turn on changes to capital-gains tax, following concerns from the business community.

Mr Brown came to power promising a "new" approach from his post-Blair administration, but Mr Hain's resignation has been viewed as the first "domino" of his government.

The Prime Minister is now under pressure to explain why he did not sack Mr Hain two months ago when questions were first raised over his failure to declare donations.

To add to his woes, Mr Brown was on a collision course with his back-benchers over anti-terror laws, after the Counter Terrorism Bill was published.

Mr Brown's bad day began when he fielded a phone call from Mr Hain at 11:30am.

The latter felt his position was no longer tenable as the Electoral Commission had referred his campaign donations to the Metropolitan Police. Mr Hain has always insisted his failure to declare the donations for his failed bid to become Labour's deputy leader was an accident.

In a statement to reporters yesterday, he said he regretted what had happened and that he felt he had "no alternative" but to resign.

Mr Brown's official spokesman said Mr Hain "was clear in his own mind" that it was the right thing for him to do. "The Prime Minister accepted it… it was not a protracted conversation," he said.

Downing Street emphasised that Mr Brown just wanted to "get on with the business of government" – he later held talks with President George Bush by video link.

In an exchange of letters with Mr Hain, the Prime Minister wrote: "I recognise that, given the circumstances and your desire to clear your name, this is the right and honourable thing to do. I also recognise that in making this decision you have, as ever, put the country's interests before your own."

Mr Hain said in his resignation letter to Mr Brown: "I made a mistake but it was an innocent mistake."

Mr Hain's fate threw the spotlight on others caught up in controversies over undeclared gifts – including Harriet Harman, a string of Labour officials and Gordon Brown's chief fundraiser, Jon Mendelsohn. It is not yet clear whether Wendy Alexander's donation for her Scottish leadership campaign will trigger a police investigation.

Despite months of speculation over donations, the Prime Minister appeared to have been caught unawares by yesterday's resignation. It took him four hours to announce the first name in the reshuffle, which saw the return of Paul Murphy as Wales Secretary. That raised questions as to why Des Browne, the Defence Secretary, should juggle the role of Scottish Secretary, while Wales has its own dedicated Cabinet post.

There is speculation that Mr Brown plans an amalgamation of both offices, along with that of Northern Ireland, to create one department for the nations and regions.

Danny Alexander, the Liberal Democrat work and pensions spokesman, compared Mr Brown's premiership to John Major's ill-fated government. "The transition from Blair to Brown feels increasingly like the transition from Thatcher to Major," he said.

"We have had the return of government incompetence, economic turmoil and political sleaze. We all remember John Major clinging on to ministerial colleagues, only to lose them in the end, and now Gordon Brown is doing the same."

Chris Grayling, the shadow work and pensions secretary, said: "This is not the fresh government that Gordon Brown promised last summer. When the Labour Party is facing not one but two police investigations, there is a real issue for Gordon Brown to address."

Angus MacNeil, the SNP MP who sparked the cash-for-honours inquiry, said: "This is the first domino of Gordon Brown's Cabinet resignations. The Electoral Commission had no option, in reality, but to give this to the police."

The prospect of a police inquiry escalated after it was revealed some of Mr Hain's donations had been funnelled through a think-tank that appeared to exist only to give cash to his campaign. It had not carried out any work or research since its inception.

At almost the same time Mr Hain was offering his resignation to Mr Brown, Mr Darling was criticised for performing a U-turn on capital-gains tax.

Following strong criticism from industry, Mr Darling unveiled a new "entrepreneurs' relief", providing a 10 per cent tax rate for up to £1 million of gains. The Tories termed that a "humiliating" reversal of a government policy unveiled in October's pre-budget report, while business leaders described it as "superficial" and said it would make little difference.

As Mr Brown's bad day continued, government hopes of a cross-party consensus on its plans to extend detention of terror suspects without charge to 42 days lay in tatters after Jacqui Smith, the Home Secretary, published the Counter Terrorism Bill.

Both the Conservatives and the Liberal Democrats said her plans risked alienating Muslims and driving people into terrorism.

A recent survey of Labour MPs showed that more than enough of them planned to rebel to cause a government defeat.

Ms Smith said she was still hopeful of winning cross-party agreement on the need to increase the pre-charge questioning limit from 28 days to 42.

She added that she would get the legislation passed, despite the threat of a back-bench rebellion.

BROWN PROMOTES TWO YOUNG GUNS

TWO ministers in their thirties were promoted to top Cabinet jobs last night.

James Purnell, 37, who was Culture Secretary, replaces Mr Hain as Work and Pensions Secretary, with Stephen Timms as his deputy. Mr Purnell faced controversy recently when it transpired he had doctored a photo to fake his presence at an event.

Andy Burnham, 38, who was Chief Secretary to the Treasury, is now Culture, Media and Sport Secretary.

Yvette Cooper, the wife of Ed Balls, the Children's Secretary, is promoted to Chief Secretary to the Treasury.

Paul Murphy returns to government as the Wales Secretary. But there is speculation the Prime Minister will create a new department for the regions and nations, amalgamating the Scotland, Northern Ireland and Wales offices, to reflect the post-devolution realities.

Liam Byrne becomes a Treasury minister, on top of his duties as a Home Office minister, while Caroline Flint is promoted to minister of state at the Department for Communities.

MPs TOE THE LINE OVER PAY RISE

MPs have accepted a below-inflation pay rise after Gordon Brown, the Prime Minister, urged them to accept the figure, in line with that awarded to public sector workers.

A day after thousands of police marched through Westminster in protest against their own staged pay rise, MPs balked at the prospect of outraging key workers by insisting on an above-inflation hike for themselves. The 1.9 per cent increase was accepted without a vote.

It also emerged last night that the MPs' pension fund faces a £49 million black hole as a result of contribution holidays taken by successive governments.

Scandals threaten to turn 'clunking fist' into an ineffectual ditherer

ANALYSIS: Gerri Peev

JUST seven months after promising a fresh approach to government in an attempt to draw a line under the Tony Blair era, Gordon Brown has been forced into a major reshuffle triggered by a funding scandal.

Business as usual, critics would say.

But the fact that a police investigation has been triggered by Peter Hain's slack accounting means the government's reputation will be clouded by controversy for months to come, even if no charges transpire.

The confirmation of another Scotland Yard investigation into Labour finances wrecked Mr Brown's new year relaunch and leaves the impression that the party is cavalier when it comes to funding issues.

After several months of difficulty, Mr Brown had temporarily steadied his ship, regained some confidence and attacked David Cameron with conviction during Prime Minister's Questions for several weeks.

But this third police investigation into Labour finances threatens the tentative optimism with the prospect of a different sort of conviction. It also raises questions over Mr Brown's judgment.

Critics say Mr Hain should have been sacked at the first whiff of controversy over his finances. After failing to call an election last autumn, despite allowing speculation to mount, the reluctance on Mr Brown's part to sack Mr Hain further reinforces his image as indecisive. Instead, Mr Brown devolved Mr Hain's fate to an unelected body, the Electoral Commission.

While Mr Brown had insisted he had full confidence in Mr Hain, he also let slip that the former minister was guilty of "incompetence" when it came to his campaign finances. Critics pounced – if Mr Hain could not remember receiving £103,000 in donations, how could he be trusted with a departmental budget of billions?

Mr Brown has been branded a ditherer by the opposition. Tories have attacked him for making no decisions on Northern Rock. He has announced at least 30 reviews into existing government policies, but apart from repeating his plans for tinkering with the constitution, little new to captivate the public imagination.

Starting with the election backdown, Mr Brown's troubles mounted: the loss of tax discs and personal details of every child benefit recipient; allowing the Tories to take the lead on inheritance tax; the near collapse of Northern Rock; and the snub by other EU leaders at the signing of the reform treaty to name just a few.

But it was Vince Cable's charge – when he was acting Lib Dem leader – that Mr Brown had turned from Stalin to Mr Bean overnight, that has the most poignancy. What started as a joke that the Prime Minister turned "order into chaos" was beginning to ring true.

Mr Brown has tried to re-energise his Cabinet by promoting two under-40s, both of them Blairites. He has also reorganised the machinery at Downing Street and the Treasury – a clear admission that things had not been going to plan.

But the jury is still out on whether his "clunking fist" is strong enough to smash the next raft of difficult events heading his way, starting with an economic meltdown.