Coalition cabinet's rising star was too terrified to admit he was gay

Two of David Laws' last acts as a Liberal Democrat cabinet minister were to rebuff the offer from a bemused civil servant of a pot plant for his new office – just before axeing the Treasury's entire budget for pot plants.

This small act of cost-cutting last Thursday, which will shave less than a hundred pounds off the country's £156bn deficit, but which was applauded by Tory MPs, was typical of the man whom friends said last night was "frugal in every aspect of his private life". To be hit by claims that he was "on the make" through his expenses was, they said, deeply ironic for a man who, despite being a self-made millionaire, lived his life as simply as possible. Despite Mr Laws' personal wealth, his Somerset cottage contains few material luxuries – only books and papers related to his political work.

But the real personal tragedy is that Mr Laws was, at the age of 44, "terrified" of revealing his homosexuality to his family – including his Catholic parents – and friends beyond his closest circle.

This was the reason why the deeply private MP had allowed himself to become entangled in a situation which has forced him to resign after just 18 days in office.

One friend, defending Mr Laws, said once the rules on paying rent to partners changed in 2006, he would have "effectively been outed" by the parliamentary authorities by declaring the arrangement. So he risked everything to keep the fact that he was gay a secret.

Mr Laws was understood to be "emotionally shattered" by the affair. One of his closest friends said last night: "He has ended up, through a series of missteps, in a right proper pickle. If you questioned how he got there and what motivated him, his decisions all the way along the line – if you know anything about David Laws – were not because he was trying to feather his nest and fleece the public – far from it.

"He is one of the most frugal people I know in his private life. He has got here because of a terribly, terribly personal tragedy about his sexuality that he was terrified of revealing. You cannot overestimate the degree to which this is a personal tragedy which is now playing out as a very public tragedy.

"He is one of the best and brightest politicians of his generation."

Before helping to form the new government, Mr Laws was best known for co-editing The Orange Book, the 2004 bible of Lib Dem modernisers, which called for, among other things, social insurance in health care. Mr Laws' own contribution lambasted the "soggy socialism" which had been allowed to take over the party. The groundbreaking book also featured contributions from Nick Clegg and Chris Huhne, whom Mr Laws sat beside at the cabinet table, and paved the way for a realignment of the party, shifting towards the economic liberalism that the coalition government now embraces.

Shortly after David Cameron became leader in December 2005, Mr Laws was targeted for defection by the Tory leader's aides, with one claiming, as early as January 2006, that he would make an "excellent" chief secretary to the Treasury.

George Osborne, who has been working closely with Mr Laws in the coalition, asked him to defect in 2007 – but Mr Laws declined.

There has long been speculation that Mr Laws would have joined the Conservative Party instead of the Lib Dems in the 1990s were it not for the former's reputation on gay rights.

When, in early 2006, the Lib Dem leadership contest was plunged into farce after one candidate, Mark Oaten, was exposed for an affair with a male prostitute and another, Simon Hughes, revealed he had had gay relationships after initially denying it, the spotlight fell on the private lives of other prominent Lib Dems.

While it was an open secret in Westminster that Mr Laws was gay, he had never come out and was deeply troubled by the media frenzy that engulfed Mr Oaten and Mr Hughes.

But once the party regrouped under Sir Menzies Campbell and later Mr Clegg, Mr Laws emerged as one of the top talents in the party.

Mr Laws was a key player in the negotiations that saw the Lib Dems form the coalition government with the Conservatives, and in the policy document published days later.

To Mr Laws, being the "axeman" for the Conservative-Liberal Democrat coalition government was a job he wanted and relished, rather than shied away from.

He once enraged Lib Dem activists by calling, in a speech at party conference, for benefits for single mothers to be cut when their children reached the age of six.

When it emerged last week that his predecessor as chief secretary, Liam Byrne, had left him a note declaring there was no money left in state funds, Mr Laws was ridiculed by Labour MPs for failing to "see the joke".

Yet, in private, Mr Laws has a self-deprecating sense of humour: once bemoaning the fact that tens of thousands of starlings had migrated to a housing estate in his Yeovil constituency and remained there for weeks. "Why me?" he said.

Born in Surrey in November 1965, he was educated at the private Catholic school, St George's College, Weybridge, before achieving a double first in economics at King's College, Cambridge.

By the age of 22, he was a vice-president at J P Morgan and became a managing director at Barclays de Zoete Wedd before the age of 30.

In 1994, he joined the Lib Dems as an economic adviser. He ran against the Tory cabinet minister Michael Howard in Folkestone and Hythe at the 1997 election, but failed to win the seat. After the 1997 election, Mr Laws became director of policy and research under Paddy Ashdown. During that time he met Jamie Lundie, who was a speechwriter for the Lib Dem leader. As a reward for his work for Mr Ashdown, Mr Laws was chosen as the party's candidate for the former leader's Yeovil seat in 2001, which he won.