At the Labour conference this year a senior Cabinet minister was asked why the party did not consider raising taxes, even by a penny, on high-earners. “You don’t remember the Shadow Budget,” he replied with a smile.

Not many people do. It happened more than 16 years ago and was an event that most people missed even then, but it has driven Labour Party policy ever since. The Shadow Budget increased taxes on middle and higher-income earners – and it lost Labour the 1992 election. Never again would Labour go into an election as a tax-raising party. Never, that is, until yesterday, when Alistair Darling and Gordon Brown finally laid the 1992 Shadow Budget, and with it new Labour, to rest.

You would have had to listen hard yesterday to hear from Mr Darling’s mouth that the middle classes were facing any income tax increase. It was but a small rise in national insurance, from 2011, for those earning over £20,000 a year. It was left to George Osborne to claim for the Conservatives that it was “a tax on the jobs and incomes of Middle Britain”. The ghost of the Shadow Budget rode again.

Neil Kinnock and John Smith were faced with a treacherous choice in their pre-election budget in 1992: whether to hit millions of people on low incomes with a tax increase, or to protect the lower-paid but hit the middle classes.

Darling's £1 trillion debt gamble

Alistair Darling stored up big tax rises for the better-paid and huge public spending curbs in his fight against recession. Watch video

• Need to know: Pre-Budget Report

• Shot in the arm for economy may prove a shot in the dark

• Parties reveal their battle lines for the next election

Life on Recession Road

The people of Marlow Road in Maidenhead, London give their verdicts on the economy

Related Links

• It's clearly worse than we thought

• Shot in the arm may prove a shot in the dark

• Darling's £1 trillion debt gamble

Trapped by a clever last-minute move by the Conservatives, Labour’s senior figures ran around for days trying to decide what to do. As Lord Gould of Brookwood, then the party’s election strategist, wrote: “I made my way to the Shadow Cabinet room, which was in half-darkness. You could almost touch the gloom. The problem we faced was appalling and insoluble. In that dark, gloomy room at 11 at night, we had to choose.” He and others said that the middle classes should be protected, for electoral reasons. Mr Kinnock and Mr Smith chose to protect the poor, and let the middle classes take the hit.

On March 17, 1992, Mr Smith presented his Shadow Budget to the nation. Labour crashed to defeat at the general election the next month. In new Labour mythology it led directly to the election of Tony Blair and the emergence of new Labour. The mistakes of the Shadow Budget created the fundamental political insight of new Labour – that the interests of middle and higher-income earners must be represented along with the poor. And that tax-raising parties do not win elections. The faultline has run through Labour’s period in office, the instinctive tax-raisers repeatedly disappointed by what they regard as pusillanimity at the top. A nervous Mr Brown prepared the ground for years before daring to increase national insurance by a penny, in good times, to fund spending on the NHS. When the wealthier were taxed, it was cautious and furtive, to the chagrin of the Left. And when Mr Brown carelessly taxed the poor last year, with the abolition of the 10p rate, Labour exploded. The party had hoped that Mr Brown would break the mould set 16 years earlier. Well he has now.

They were all there that day in 1992. Mr Brown and Mr Darling were frontbenchers (along with Mr Blair), while Peter Mandelson was in charge of the election campaign.

There was somebody else in the Commons yesterday who will have remembered it. In March 1992 a team of bright young Conservative strategists, the sharpshooters for John Major’s reelection campaign, gathered around a television in Smith Square. Known as the “brat pack”, their brief was to watch Mr Smith deliver the Shadow Budget and comb through his figures. The name of one of the brightest brats? David Cameron. As Francis Elliott has written in his biography of Mr Cameron: “As they watched Smith’s pre-election ‘Budget’ on Sky TV they could hardly believe their luck. It was supposed to neutralise Tory claims about Labour’s spending commitments – instead it gave them boxes of fresh ammunition.”

The Tories ran a devastating poster campaign (invented by Mr Cameron and his right-hand man Steve Hilton) still remembered with dread by everybody involved in Labour’s 1992 election attempt: the tax bombshell. Rebranded yesterday by Mr Osborne as “not just a tax bombshell, a precision guided missile”, the same advertisement is flying out of Conservative Central Office again today.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive