Lord Mandelson axed radical government plans to impose regulatory curbs across Whitehall, provoking a backlash on Thursday from business.

Innovative proposals to set “regulatory budgets” limiting the amount of new red tape each government department could impose have been shelved, the business secretary announced.

Lord Mandelson said the government would instead introduce regulatory measures “tailored to the present exceptional economic circumstances”. These measures include setting up two new committees to replace an existing committee on red tape. The government also committed to introduce targets, as yet unspecified, for cutting the total cost of regulation from 2010 onwards.

Officials denied the U-turn had been driven by Whitehall resistance.

The political difficulties of a drive to cut regulation, at the same time as responding to voters’ calls to tighten curbs on the banks, may have been a factor in Lord Mandelson’s decision. But he insisted the government would help companies weather the recession by avoiding new red tape that increased burdens on business “except where there is a clear case for action now”.

The Tories accused the government of inconsistency. “While the prime minister tells the G20 he wants to improve regulation, Lord Mandelson is quietly mothballing the government’s main scheme for doing just that,” John Penrose, the shadow business minister, said. “Struggling businesses don’t need a new Whitehall sub-committee to talk about how to cut red tape, they need real help now.”

Business reacted angrily, calling on ministers to impose an immediate moratorium on new non-financial regulation. “The CBI is greatly disappointed by the government’s backtracking,” John Cridland, the deputy director, said.

The Institute of Directors accused the government of delivering a “hammer blow to business” by “pulling the plug” on the new initiative.

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