Tax credit U-turn as Osborne defeated by Lords

Flagship welfare reforms to be softened as Cameron orders review of Upper House

GEORGE OSBORNE was last night forced to water down his flagship tax credit reforms after peers voted to delay the cuts and caused a constitutional crisis.

In an historic move, the Lords voted for the Chancellor to stop his tax credit reforms until he comes up with a way of “compensating” low-paid workers for three years.

The defeat immediately forced Mr Osborne into an about-turn. The Chancellor announced that he would next month reveal measures to soften the impact of the cuts on the lowest paid.

Mr Osborne said: “I said I would listen to the concerns being raised and that is precisely what I will do.

“We can achieve the same goal of reforming these tax credits, securing the money we need to ensure our economy is safe, and at the same time helping in the transition to these changes and I will set out how we achieve that at the Autumn Statement.”

Peers voted down the measures despite being warned that they would provoke a “constitutional crisis” because the reforms have already been passed by the House of Commons.

It is the first time in 100 years that the Lords has voted down a financial package backed by MPs in the Commons and will be seen as a major blow to Mr Osborne.

In the minutes after the votes, David Cameron suggested the Government would seek retribution for the defeat.

He announced a “rapid review” to ensure peers are unable to vote down future government finance Bills.

It raises the prospect of new rules preventing peers from voting on similar packages of reforms.

There have been suggestions that the Conservative could create scores of new peers to ensure that they have a majority in the Lords.

A Downing Street spokesman said: “The Prime Minister is determined we will address this constitutional issue. A convention exists and it has been broken. He has asked for a rapid review to see how it can be put back in place.” Earlier in the Lords, peers demanded that Mr Osborne “rethink” the £4.4 billion cuts to the tax credit system that he announced earlier this year.

A coalition of Labour and Liberal Democrat peers joined with senior figures in the Church of England to savage the tax credit cuts as “morally indefensible” and demand that they be rejected.

The Government lost two votes calling for a delay to the reforms. However, a Liberal Democrat motion to “fatally” kill the changes failed.

Mr Osborne will now be forced to consider ways of mitigating the cuts. He could still consider wrapping the tax credit reforms into the Finance Bill – which is passing through the Commons – but he would be accused of ignoring the will of the Lords and would face heavy criticism.

The delay could prove especially damaging as it may force the Government to carry out major welfare reforms close to the general election in 2020.

Conservatives reacted furiously in the minutes after the Lords’ votes.

Michael Ellis, Theresa May’s parliamentary private secretary, said: “It should and hopefully will have consequences for the House of Lords.”

Edward Leigh, the senior Tory backbencher, said: “Not for 100 years has the House of Lords defied this elected House. This is a serious matter and I ask for [the Speaker] to give a statement to protect the rights of the elected representatives, not just for us but for the people of this country.”

In dramatic scenes in the House of Lords, peers and members of the clergy lined up to criticise Mr Osborne’s welfare changes. The Archbishop of York, Dr John Sentamu, said it was “economics devoid of morals and

‘Not for 100 years has the House of Lords defied this elected house. This is a serious matter’

ethics” and said the measures were a “hasty way of reducing and cutting tax credits”. He voted to delay the reforms.

Lord Lawson, the former Conservative chancellor, said a “great deal of the harm” would be done to lowest-paid workers as a result of Mr Osborne’s plans. The Bishop of Portsmouth, the Rt Rev Christopher Foster, said: “These proposals are morally indefensible. It’s clear to me and many others that these proposals blatantly threaten damage to the lives of millions of our fellow citizens.

Baroness Hollis of Heigham, the former Labour work and pensions min- ister who tabled one of the amendments, urged peers to “keep faith with struggling families” by delaying controversial cuts in tax credits.

Baroness Stowell, the Conservative leader of the Lords, had warned that Labour and Liberal Democrat motions to kill or delay the cuts would take Parliament into “uncharted territory”.

Earl Howe, the deputy Conservative leader in the Lords, said Labour’s amendment would “hold the Government hostage”. He said: “We might be able to bring back some different regulations but what if those were unacceptable to the house? It puts us on to a perpetual treadmill.” Lord Butler, the former cabinet secretary, said peers would be committing a “constitutional infringement of great gravity” if they back any of the motions blocking tax credit changes.

Baroness Smith of Basildon, shadow leader of the Lords, accused ministers of attempting to “bully” the Lords.

Mr Osborne yesterday met around 20 Conservative backbenchers who are uncomfortable with the tax credit cuts. A non-binding vote will take place in the Commons on Thursday on the reforms. There are concerns that the decision taken in the House of Lords will now embolden Tory rebels to vote against the Government.