David Cameron is planning to set limits on the power of the House of Lords after George Osborne suffered a major blow to his authority when peers voted to delay tax credit cuts in order to protect those who would lose out.

Downing Street will on Tuesday outline plans for a “rapid review” that will examine ways to guarantee that the House of Commons always has supremacy on financial matters, after the prime minister accused peers of breaking a constitutional convention. The move comes after peers voted in favour of a motion by the former Labour minister Lady Hollis to halt the cuts until the government produces a scheme to compensate low-paid workers for three years.

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A furious prime minister made clear that the upper house had ridden roughshod over conventions dating back to the aftermath of Lloyd George’s People’s Budget of 1909 and beyond, according to which peers do not interfere in financial matters. The planned tax cuts are designed to provide £4.4bn of the chancellor’s planned £12bn in welfare cuts.



“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,” said a Downing Street spokesman.



George Osborne, the chancellor, indicated that he will seek to calm tensions by softening the impact of the cuts which have been put on hold by the upper house’s vote. In language that reflected some of the motion, he told the BBC he would help people struggling in the “transition” period when he delivers his autumn statement on 25 November.

Osborne, who is likely to face Labour taunts in the House of Commons on Tuesday morning when he takes the monthly session of Treasury questions, told the BBC: “Unelected Labour and Liberal Lords have defeated a financial matter passed by the elected House of Commons, and David Cameron and I are clear that this raises constitutional issues that need to be dealt with. However, it has happened, and now we must address the consequences of that. I said I would listen and that is precisely what I intend to do. I believe we can achieve the same goal of reforming tax credits, saving the money we need to secure our economy while at the same time helping in the transition. That is what I intend to do at the autumn statement.”

It is understood that Osborne will make clear in his autumn statement that he remains determined to scale back the use of tax credits which used to be available to nine in every 10 families and are set to be available to only five in 10 under his changes.



But he will announce that he will soften the impact of the planned cuts for a transitional period amid concerns among ministers about the lack of government response to claims by the Institute for Fiscal Studies (IFS) that 3 million families would lose £1,000 a year. Under his original plans, the earnings level at which tax credits start to be withdrawn will be reduced from £6,420 to £3,850 from next April.

The “rapid review” will find ways of ensuring that financial measures cannot be overturned by the House of Lords. Labour argued that it had a free hand because the tax credits were being introduced through a statutory instrument and had not been declared as a formal financial measure. The review will also look at ways of guaranteeing that statutory instruments cannot be overturned by the Lords, who have only done so on five occasions.

The government is happy for Tories to speculate that the prime minister will fill the Lords with up to 100 new Conservative peers in a bid to neutralise Labour and the Liberal Democrats in the upper house. But this will not happen because No 10 realises that it would present the politically unpalatable spectacle of a Tory prime minister packing the upper house to push his measures through.

Downing Street and Treasury officials swung into action after Hollis’s motion was passed by 289 to 272 votes. Peers also voted in favour of a milder motion by the crossbench peer Lady Meacher – by 307 to 277 votes – that declined to support the cuts until the government responds to the IFS analysis. A fatal motion, tabled by the Lib Dem peer Lady Manzoor, was defeated by 310 votes to 99.

The Hollis motion said the upper house would decline to approve the tax credit cuts until the government delivered a “scheme for full transitional protection for a minimum of three years for all low-income families and individuals currently receiving tax credits before April 6 2016”.

Michael Ellis, Tory MP for Northampton North and parliamentary aide to Theresa May, told Sky News: “We cannot have a situation where the unelected [House of Lords] overrules the democratically elected House of Commons. The House of Lords has resisted that temptation for 100 years ... Tonight’s votes, particularly on the Labour motion, [are] a constitutional outrage. This involves £4.4bn worth of public spending. The principle that the House of Commons holds sway over financial matters is a crucial one to the functioning of our constitution.”

The vote came after Hollis was heard in silence as she spoke of the impact of the cuts. She told peers: “I hope I don’t sound pious, but I think this is about honouring our word, the prime minister’s word, that work must always pay. It is about, surely, respect for those who strive to do everything we ask of them but now find themselves punished for doing what is right. It is about trust between parliament and the people we serve.”

John McDonnell, the shadow chancellor, said he will cooperate with the chancellor if he abandons the tax credit cuts altogether. McDonnell, who will be able to challenge Osborne in the Commons on Tuesday, said: “The chancellor needs to understand that cutting on average £1,300 a year from over 3 million working families is not a sensible plan, and people are waking up to what Labour has been warning on this for months. George Osborne needs to now go away, and consider the only reasonable option open to him. If he U-turns fairly and in full on his tax credit cuts, then I will support him on it, and so will the public.”

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Peers across the Lords registered their deep unease with the proposed cuts to tax credits. Lord Lawson of Blaby, the former chancellor, called on Osborne to do more to help low-income earners. He said: “Here a great deal of the harm is at the lowest end, and that is what needs to be looked at again.”

John Sentamu, the archbishop of York, voted for the Hollis motion after warning that the tax credit cuts could force low-income families to use loan sharks. Sentamu told peers in his speech: “For families on poverty wages, we want to say to them: the government is serious about deficit reduction, but wants to do it in an orderly fashion that will not actually leave men and women ... in the hands of loan sharks.”



