Osborne bows to pressure and will soften impact of cut to tax credits after double Lords defeat

Whitehall sources have already hinted he could mitigate the impact of the cuts by raising the rate at which employees pay national insurance contributions or by accelerating his planned rise in the tax-free allowance.

Mr Osborne criticised "unelected" Labour and Liberal Democrat peers for blocking the Government on a financial measure and No 10 indicated the Prime Minister would launch a "rapid review" into the constitutional fallout of the bruising result.

"David Cameron and I are clear that this raises constitutional issues that need to be dealt with," declared the Chancellor.

"However, it has happened, and now we must address the consequences of that. I said I would listen and that's precisely what I intend to do. We can achieve the same goal of reforming tax credits, saving the money we need to save to secure our economy while at the same time helping in the transition.

"That is what I intend to do at the Autumn Statement. I am determined to deliver that lower welfare, higher wage economy that we were elected to deliver and the British people want to see," he added.

Peers defied calls to respect a century-old convention that the unelected upper chamber does not block financial measures approved by the Commons, sparking claims of a "constitutional outrage".

"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.

Following the defeat, Lord North of Louth urged David Cameron to sack dozens of peers in the wake of a humiliating vote to delay tax credit cuts.

He rejected suggestions that the Prime Minister should pack the House of Lords with more than 100 extra Tory members.

Ministers should slim down the Upper Chamber instead, he suggested.

Mr Cameron is the first Conservative prime minister not to have a majority in the Lords.

Downing Street is to set out plans for a 'rapid review' of the second chamber later.

Lord Norton, Professor of Government at the University of Hull,  who has been described as the "the UK's greatest living expert on Parliament", said that there was a danger in the wake of the tax credits vote of ministers approaching the issue from "the wrong end".

"We should not be increasing in size but reducing, “ he said.

"Why not take the opportunity to slim down the size ... while addressing the point that the PM is concerned with?”, he asked MPs on the Commons Public Administration and Constitutional Affairs Committee.

He said that peers “already take the view that we are too large (in number), both in terms of how we are seen.. and in terms of efficiency”.

John McDonnell urged Mr Osborne to “think again" over the tax credit cuts, which, critics say will, on average, result in a loss of £1300 a year to some three million UK households, including 350,000 in Scotland.

The Shadow Chancellor said people had been "shocked" over the way the Government had pushed ahead with the deeply divisive welfare reforms and insisted the double defeat by peers showed it was time for a "full and fair reversal" of the policy.

Peers backed a motion, put down by crossbench peer Baroness Meacher, by a majority of 30 delaying the cuts until the Government responded to analysis of their impact by the Institute for Fiscal Studies and considered "mitigating action".

Earlier, a Liberal Democrat bid to kill off the cuts altogether was heavily defeated by 310 votes to 99, a Government majority of 211.

The votes came after Lords LeOsborne ader Baroness Stowell of Beeston warned peers not to challenge the "primacy" of the Commons on financial matters.

She insisted the Chancellor would listen "very carefully" to concerns about the cuts if the Lords stepped back from rejecting or delaying them.

But minutes later the Government was defeated for a second time as peers voted by 289 to 272, a majority of 17, for a Labour motion to delay the cuts until Ministers came forward with "full transitional protection" for those affected for at least three years; which, many believed would effectively kill off the cuts.

In a huge turnout for the votes, Labour imposed a three-line whip and reported the presence of Tory peers not seen in the Upper Chamber for years.

Lady Meacher condemned the Government's "bullying tactics" over the issue while, to Opposition cheers, the Bishop of Portsmouth, the Right Reverend Christopher Foster, branded the Government cuts “morally indefensible”.

Lord Lawson, the former Conservative chancellor, criticised the way the cuts to tax credits were being pushed through. He urged "tweaks" to the policy to reduce the "financial harm" to those on the lowest incomes, saying it was "not just listening which is required but change".

Meantime, Labour’s Baroness Hollis of Heigham, a former Work and Pensions Minister, urged peers to "keep faith with struggling families" by delaying controversial cuts in tax credits.