The revelation comes as ministers face criticism over a series of broken promises. The Chancellor, Gordon Brown, has quietly dropped plans for automatic rises in tobacco tax, while it emerged yesterday that plans for free admission to museums and galleries have also been dropped.
The housing benefit proposals, intended as the centrepiece of Tony Blair's welfarereforms, have been downgraded as it is feared they would prove too costly and complex.
Mr Blair had hoped that ministers could come up with a viable alternative to a benefit that currently pays the rent of more than 4.5 million people on low incomes.
But a review of the system has concluded that wholesale reform would cost pounds 5bn in the short term while leaving the poorest tenants even poorer.
"It's like the poll tax. It cost a hell of a lot of money to get out of that particular hole and it would cost a hell of a lot of money to get out of this one," a government source said.
Instead of radical change, ministers are expected to announce in a Housing Green Paper that "streamlining" the system is the best option before the general election.
The aim is to tackle housing benefit fraud, estimated to be running at up to pounds 600m a year, by simplifying the system and centralising control through nationwide computerisation.
Ministers say the watered-down plans are "sensible", but the Conservatives may seize on the climbdown as more evidence of Labour's failure to carry out radical welfare reform.
Mr Blair ordered a review of the system more than a year ago, after declaring it was one of the most "complex, unpredictable and inconsistently administered" parts of the welfare state.
The cost of housing benefit has doubled since 1990 and trebled since 1986, partly because of large rent increases due to the last government's decision to deregulate rents.
As rents are paid virtually in full by local councils, who then claim back the cash from the Department of Social Security, tenants have no incentive to seek cheaper accommodation.
The system's critics claim that the taxpayer is at the mercy of unscrupulous landlords who charge unrealistic prices for substandard flats.
Following Mr Blair's alarm at the rising costs, Mr Brown ordered Whitehall officials to look into the possibility of axing housing benefit and replacing it with tax credits for those in work and a housing allowance for those out of work. A new tax credit was intended to dovetail with his working families tax credit.
However, the review has found that a tiny proportion of claimants are in work and eligible for a tax credit. Similarly, plans to set up different regional rates of benefit have been deemed to be too complex.
Scrapping the current system would also risk another revolt by Labour MPs worried about poor tenants being left without a housing safety net.
The Conservatives attempted to curb the rising costs of housing benefit by linking the amount paid to average rents in each area, but ministers claim the changes only made the system more complicated.
Housing benefit now accounts for almost one-eighth of the entire social security budget. Forty per cent of claimants are pensioners, and six out of 10 live in council homes.Reuse content