U-turn looms on tax credits: Osborne ready to spend millions softening flagship policy as Tory rebels warn wages could 'fall off a cliff'

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George Osborne is set to perform an embarrassing U-turn to defuse the growing Tory revolt over his tax credit cuts, according to ministers.

The Chancellor is considering a multi-million-pound package of measures to avoid claims his flagship welfare reform policy penalises low-paid workers.

News of the rethink comes on the eve of tomorrow’s Lords revolt over the cuts to tax credits which, according to opponents, could initially cost some families £20 a week.

George Osborne is set to perform an embarrassing U-turn to defuse the growing Tory revolt over his tax credit cuts, according to ministers

Several Tory peers, including former chancellor Nigel Lawson and ex-Conservative chairman Norman Tebbit, have backed warnings that the cuts are a misjudgment. Senior Tory MP David Davis compared them to Margaret Thatcher’s ill-fated ‘poll tax’ and Boris Johnson said they ‘bear down unfairly on the working poor’.

Government sources concede in private that the cuts will almost certainly be watered down. It is believed the concessions will be announced in Mr Osborne’s Autumn Statement on November 25.

A well-placed source said: ‘Understandably, the Chancellor does not want to lose face by acting before the issue is settled in Parliament. It is mainly about timing, details and costings.’

But Treasury sources last night denied there will be a climbdown and maintain the thrust of the reforms will remain intact.

Last night, a senior Treasury source said: ‘The policy is not changing and it has been backed by MPs more than once. It is up to the House of Lords to decide if it wants to defy 400 years of convention and seek to hold up a measure involving billions of pounds of public money put forward by a Government elected with a clear mandate to save £12 billion from the welfare bill.’

Reports of an impending U-turn were fuelled by Ruth Davidson, leader of the Scottish Tories, who told The Mail on Sunday she is certain the cuts will be modified. 

Chancellor of the Exchequer George Osborne tours the National Graphene Institute at Manchester University

She said it would be wrong for the wages of some workers to ‘fall off a cliff’ when the reforms are introduced in April, adding: ‘If we’re not the party of getting people into work and making it easier for them to get up the tree then what are we there for?’ She had raised her concerns at ‘Cabinet level’ and been assured changes were coming.

Separately, Tory MPs critical of the plans predicted the Government would not get the cuts through the Commons a second time without a compromise.

Tory MP Andrew Percy said that, if the Lords blocked the plans tomorrow, he and like-minded Tories would not back Mr Osborne if he simply tried to reintroduce the same package in the Commons.

Several of the Chancellor’s allies fear the controversy could undermine his bid to rebrand the Tory Party as the ‘workers’ party’ – seen as a vital part of his own ambition to succeed David Cameron as leader.

But others worry a U-turn could make him look weak. Mr Osborne has spoken candidly of his humiliation following the ‘Omnishambles’ Budget of 2012, when he was forced to perform U-turns over the so-called ‘pasty tax’ and ‘caravan tax’. It led to him being booed at the 2012 London Olympics.

Osborne has pledged to save more than £4 billion a year in tax credits by replacing the subsidy for workers on low incomes with a ‘Living Wage’. This would see minimum pay increase from the current £6.70 an hour to £9 a hour in 2020. But critics say it will leave many families out of pocket in the early stages.

Several of the Chancellor’s allies fear the controversy could undermine his bid to rebrand the Tory Party as the ‘workers’ party’ – seen as a vital part of his own ambition to succeed David Cameron as leader

The Chancellor is said to be considering ways to ameliorate the cuts, including speeding up a scheduled increase in the personal tax allowance – due to rise to £11,000 from April and £12,500 over five years. He may also exempt some existing tax credits claimants from the changes, or slow down the rate at which cuts are made. The target for achieving £12 billion of welfare savings could also be delayed.

Some experts say the welfare cuts will lead to an extra 200,000 working households living in poverty by 2020.

Public dissent over the changes came to a head when a Tory voter berated Cabinet Minister Amber Rudd on BBC1’s Question Time. 

Audience member Michelle Dorrell said she had abandoned the party over the issue. She told Ms Rudd: ‘I work bloody hard for my money to provide for my children. I can hardly afford the rent I have to pay, I can hardly afford the bills I’ve got, and you’re going to take more from me. Shame on you.’