Downing Street is heading for a showdown with the House of Lords over controversial plans to cut tax credits, as Nicky Morgan became the first cabinet member to suggest that the government will soften the impact of the changes.

Government faces showdown in House of Lords over tax credit cuts

Written by Nicholas Watt Chief political correspondent The Guardian 

Amid growing fears among ministers that the government is in danger of suffering severe damage over the cuts to low-paid workers, the education secretary said that George Osborne is in “listening mode”.

Morgan indicated the chancellor may take action to mitigate the effects of the cuts as Downing Street and the Treasury applied intense political pressure on the House of Lords not to throw out the cuts in a series of votes on Monday.

There were suggestions that Downing Street could flood the lords with new Tory peers or limit its powers if the cuts are blocked. If peers vote for a non-binding “regret motion” then the chancellor is expected to indicate that he would act to soften the impact of the cuts in his autumn statement on 25 November.

The government adopted hardball measures with peers because a rejection of the cuts would force the chancellor to take his deficit reduction plans back to the drawing board. The tax credits cuts account for £4.4bn of his planned £12bn in welfare cuts.

Sources said that peers had only rejected “statutory instruments” – the measures that are delivering the changes to tax credits – on five occasionsover the past century and none of these applied to financial matters.

Lord Heseltine, the former deputy prime minister, and Michael Howard, the former Tory leader, warned in separate broadcast interviews that it would be unprecedented for the Lords to block such an important part of the chancellor’s deficit reduction plan.

Labour and the Lib Dems said they would press ahead with their challenge to the cuts on the grounds that the tax credit cuts are included in a statutory instrument rather than in a finance bill which peers cannot delay or block. Peers will hold up to four votes which will determine the fate of the tax credit cuts in the following order:

  • A “fatal motion”, tabled by the Liberal Democrat peer Zahida Manzoor, which would kill the tax credit cuts stone dead. This motion, dubbed in the Lords as the “Farron motion” after the Lib Dem leader, who has forced reluctant party peers to accept it, will fail because Labour is not whipping its peers to support it.
  • A motion, to be tabled by the crossbench peer Molly Meacher, that would delay the cuts until the government spells out how it will help low-paid workers. It cites a report by the Institute for Fiscal Studies (IFS) that 3 million families would lose £1,000 a year. Meacher is facing intense pressure from the government to back down. Labour does not expect Meacher to force a vote on her motion if the government says it will produce a report highlighting the impact of the cuts on different income groups.
  • A motion, to be tabled by the former Labour minister Patricia Hollis, which would halt the cuts until the government until it produces a scheme to compensate low paid workers for three years. This is the most dangerous motion for the government because it would force the chancellor to go back to the drawing board. It explains why the government is issuing such dire warnings to the Lords about the dangers of blocking financial measures.
  • A “motion of regret”, to be tabled by the bishop of Portsmouth, Christopher Foster. The government is hoping that crossbench peers, who are wary of being overly hostile to the government, will support this motion. This would allow peers to register their opposition without disrupting the government’s plans.

The government is nervous because David Cameron leads the first Tory government to enjoy a majority in the Commons without a majority in the upper house. There are 249 Tory peers, 212 Labour peers, 111 Lib Dem peers, 176 crossbenchers and currently 25 bishops.

The education secretary said that there would be no change to the main policy, but she indicated the chancellor may take action to mitigate the effects of the cuts. “The prime minister has made it clear that the policy is not going to change,” she said. “But the chancellor’s track record has been very much about supporting budgets in working families. MPs have voted three times to support these measures – in the budget, we had a vote in September, we had a vote last week as well.”

In her interview Morgan indicated that senior ministers are conscious that they are facing a potentially dangerous political moment when she acknowledged that people would be very concerned when they receive formal notification of the changes to their tax credits. At least three cabinet ministers and a host of other ministers outside cabinet have voiced concerns in private that the cuts are undermining Osborne’s description of the Tories as the new workers’ party.

Morgan spoke out after the Guardian reported that there is a growing expectation among senior figures in Whitehall that the chancellor will give ground by ensuring that the impact of the cuts is softened. Ministers have been alarmed by the Treasury’s failure to counter claims by the Institute for Fiscal Studies (IFS) that 3 million families would lose £1,000 a year.

The chancellor could act by raising the rate at which employees start paying national insurance or by accelerating the raising of the tax free personal allowance. The easiest, but most unlikely way, to raise spare funds would be to delay his target of delivering a budget surplus by a further year to 2020-21.

John McDonnell, the shadow chancellor, said on the Andrew Marr Show that he had written to Osborne to say he would work with him if he changed course.

McDonnell, who came under fire for changing his position on the fiscal charter, said: “This is becoming above politics. I have written to George Osborne to say look, I know what a U-turn looks like and how it can damage you. But we need a U-turn on this one and so I have said to him, if you change your mind on this, we will not make any political capital out of this.”

Source: The Guardian written by Nicholas Watt Chief political correspondent