The government has been dealt a major blow after the House of Lords voted to delay tax credit cuts and to compensate those affected in full.
Peers voted by 289 votes to 272 to provide full financial redress to the millions of recipients affected.
They earlier inflicted a second defeat by backing a pause until an independent study of the impact was carried out.
George Osborne said he would heed the outcome of the vote, but said it raised “constitutional issues”.
The chancellor criticised “unelected Labour and Lib Dem lords” for defying the will of the elected House of Commons, but said he would set out how the proposed changes to tax credits would be modified in response in next month’s Autumn Statement.
“I said I would listen and we will listen to the concerns that have been raised,” he said.
“I believe 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.. I’m determined to deliver that lower welfare economy the British people want to see.”
But the BBC’s political editor Laura Kuenssberg said it was a “very bad result” for the government but it was not clear what it meant for recipients of tax credits.
Labour reacted by calling for a “full u-turn” over the tax credit changes.
On a dramatic evening in the House of Lords, peers threw out a “fatal motion” tabled by the Lib Dems, which would have blocked the changes entirely.
If it had passed, the Lib Dem motion would have stopped the £4.4bn cuts to tax credits in their tracks and sent the proposals back to the drawing board.
But peers backed calls, by 307 votes to 277, led by crossbench peer Baroness Meacher for the cuts to be put on hold pending an independent analysis.
They also supported a Labour plan to provide transitional financial support for at least three years for those likely to be affected.
Baroness Meacher told Sky News that the government was “pulling the rug” from under the feet of working people, saying the outcome sent a “powerful message” to MPs to think again.
Ministers argued peers did not have the right to block financial measures approved by the House of Commons, with Lords leader Baroness Stowell telling them the “financial primacy” of the Commons had been in place for 300 years and to ignore this would be an “unprecedented” challenge.
Urging peers to reject the critical motions, she said the squeeze on tax credits should not be treated “in isolation” but was part of the government’s “economic strategy and vision for the country”.
But speaking during a three-hour debate, former Conservative Chancellor Lord Lawson urged “tweaks” to the policy to reduce the “financial harm” to those on the lowest incomes, saying “it is not just listening which is required, but change”.
From BBC News
Of course, when the left was calling for House of Lords reforms at the turn of the century, as launched under New Labour plans, the Tories staunchly defended the Lords, where most of them planned on ending up when the public could no longer stomach them in the Commons, by claiming that the Upper House “defended British Democracy” and that it was a very important part of our constitution.
Now that the vile planned Tax Credit reforms have been delayed by the Lords due to the wide belief in the house that reforms were largely harmful and unfair to a majority of those that would be affected, the Lords has potentially caused a “Constitutional Crisis” and has been branded undemocratic by Tory Media Attack Dog, the Daily Mail.