Tax credits: George Osborne promises to 'lessen' cuts and jokes about axing Lords

George Osborne has promised to "lessen" his flagship tax credit cuts after the House of Lords made a rare move and blocked the welfare reform. The Conservative chancellor revealed he would outline more details of his rehashed policy on 25 November when he delivers his Autumn Statement.

The embarrassing move comes after peers backed two out of three motions to stop the cuts passing into law. The parliamentarians supported a motion tabled by cross-bencher Baroness Meacher with 307 votes to 277 and also passed a motion by Labour's Baroness Hollis by 289 votes to 272.

Osborne will now have to go back to the Treasury's drawing board and produce a reply to the Institute for Fiscal Studies' (IFS) report on the cuts and come up with a scheme for the "full transitional protection for a minimum of three years for all low-income families and individuals currently receiving tax credits before 6 April 2016".

The chancellor did not take the defeat lightly when he faced MPs at Treasury questions on 27 October as he attacked the "unelected" upper chamber and restated David Cameron's warning of a "rapid review" of the Lords.

"Unelected Liberal and Labour peers voted down the financial measures on tax credits approved by this elected House of Commons – that raises clear constitutional issues which we will deal with," Osborne argued.

"We will continue to reform tax credits and save the money needed so that Britain lives within its means while at the same time lessening the impact on families during the transition. I will set out plans in the Autumn Statement that we remain determined as ever to build the low tax, low welfare, high wage economy that Britain needs and the British people want to see."

'Abolish the Lords'

Osborne faced across from his Labour counterpart, shadow chancellor John McDonnell. The left-winger hit back at Tory claims of a "constitutional crisis" and promised not to attack Osborne if he U-turned on the tax credit cuts.

"Can I remind the house, for three million people out there, who have done everything asked of them – bringing up their children, going to work – this is not a constitutional matter; they will lose £1,300 a year," McDonnell said. "Given what happened in the other place last night, can I reassure the chancellor that if he brings forward proposals to reverse the cuts to tax credits, fairly and in full, he will not be attacked by this side of the house."

But the session was not without humour as Osborne, who has been tipped as David Cameron's successor, joked about scraping the upper chamber when SNP MP Patrick Grady asked: "How much would the chancellor save for the public purse by abolishing the House of Lords?"

"Now that is a very decent proposal for the Autumn Statement, which we will give proper consideration to," Osborne quipped. "People who have been in parliament with for the past 14 years know my view is clear – we should have an elected House of Lords."