Senior Treasury sources confirmed last night that Gordon Brown will overturn the defeat when the Social Security Bill returns to the Commons, but it gives the Chancellor the potentially embarrassing problem of explaining to his own backbenchers why he needs to delay the cuts in NICs promised in the Budget.
The Tory defeat of the Government would force Mr Brown to implement the cut without delay, costing the Treasury around pounds 1.5bn, which has not been budgeted for. A Treasury source said it was clear at the time of the Budget that the promise to lift all NICs from the first pounds 81 in weekly pay would have to wait until after the introduction of other complicated tax changes, including the introduction of family tax credit.
That version of events was dismissed by Lord Higgins, a former Treasury minister who told peers that the Chancellor had never mentioned delaying the cut in NICs in his Budget statement. The shadow chancellor, Peter Lilley, weighed in last night, saying the Tory defeat of the Government would save every employee pounds 1.35 a week.
Iain Duncan Smith, the Tory spokesman on social security, said: "The Chancellor gave everyone the impression that he was going to cut NICs and it was not until he went before a select committee that he started to backtrack.
"This goes right to the heart of government - it is all about presentation over substance. They say one thing and do another. He has misled the British public, and we are holding him to account."
But the government defeat by 146 votes to 115 risks intensifying the war of words between the Tory and Government front benches over the Government's determination to reform the Lords. By inflicting the defeat, the Tories emphasised their power over the Lords and reinforced the threat this week by Lord Cranborne, the Tory leader of the Lords, that they could block Government business if they choose to.
The defeat will make the Government even more determined to abolish the right of hereditary peers - who help to bolster the Tory majority in the Lords - to sit and vote in the Upper Chamber.
A furious Liberal Democrat source said: "The Tories are playing ducks and drakes with the Government. They knew that the House would be relatively empty because of the local elections, and they have used guerrilla tactics to defeat the Government."
It was Government's19th Lords defeat since it came to power last May.