The Chancellor, Kenneth Clarke, is examining ways of reducing jobless pay by cutting the period of entitlement from a year to six months, saving an estimated pounds 400m a year.
The Shadow Social Security Secretary, Donald Dewar, said the Government could expect a bitter parliamentary battle if the plans went ahead.
The Department of Employment has been pressing for a wholesale review, but the Treasury wants the maximum savings as soon as possible. Whitehall sources said no agreement had yet been made.
About 1.6 million of the 2.8 million unemployed have been out of work for more than six months.
Meanwhile, the Chancellor's plans to impose VAT on domestic fuel at a full 17.5 per cent from April have been derailed - because of the short- term cost to the Treasury.
Instead the Chancellor is expected to keep to the two- stage timescale which imposes VAT at 8 per cent in April, increasing to the full 17.5 per cent the following year.
Treasury ministers have been hamstrung by their commitment to increase income support from April to compensate for the changes. It means that the Government will be paying out before the revenues from VAT on fuel flow in.Reuse content