Nick Clegg has told David Cameron that his general election pledges to protect universal welfare payments such as child benefit and winter fuel payments for the elderly are unworkable.
The Deputy Prime Minister and his fellow Liberal Democrat ministers appear to be winning their battle to curb welfare handouts to the better off in order to protect the most vulnerable in society. But the proposed restrictions on so-called "middle-class welfare" could anger many Conservative MPs, who fear a backlash from their party's supporters.
The issue of where the cuts should fall is highly sensitive because before the May election, Mr Cameron dismissed as "lies" Labour's claims that the Tories would cut benefits for pensioners and sought to reassure the middle classes that child benefit would not be cut if he won power.
As The Independent revealed yesterday, Mr Clegg is under growing pressure from Liberal Democrat MPs and activists to show that his party is having a real influence over the coalition Government's policies. Although he cannot risk upsetting the Tories by trumpeting a victory over welfare reform, senior Liberal Democrats are increasingly confident that the Government will adopt their strategy of targeting benefits to protect those at the bottom of society. They hope the decision would allay the fears of party doubters.
The Liberal Democrats took a harder line than the Tories on "middle-class welfare" before the election and ministers including Mr Clegg and the Business Secretary Vince Cable have now formed an alliance with the Work and Pensions Secretary Iain Duncan Smith, who wants to cut universal benefits paid to the relatively well off.
Mr Duncan Smith is under pressure from the Treasury to find savings of £13bn after clashing with the Chancellor George Osborne over his demand to spend an extra £3bn on "making work pay" to encourage people on benefit to take jobs. Yesterday, Whitehall sources insisted that their dispute was "in the past" and that the two men could now see a way forward for Mr Duncan Smith's plans for sweeping changes to the welfare system. It could include a single out of work benefit.
Meanwhile, Downing Street opened the door to changes to universal handouts by refusing to confirm that child benefit and winter fuel payments would continue in their current form. Mr Cameron's official spokesman said: "There is a spending review under way. That... is having to look hard at the welfare bill and the expenditure that takes place. When that process concludes there will be an announcement."
The Government is unlikely to scrap such benefits, which would be highly controversial, but ministers are considering ways of restricting them. For example, child benefit could be curbed for people paying the 40p in the pound rate of income tax or cut for the second and third child. At present, parents receive £20.30 a week for the first child and £13.40 a week for each other child. The benefit costs £11bn a year.
The age at which people are entitled to winter fuel allowances could be raised from the current 60 on the grounds that the state retirement age is due to rise. Options include delaying it until 70 or 75. The scheme costs £2.7bn a year and critics claim it hands £250 a year to some people who do not need it. The over-80s received £400 last winter.
If the proposed curbs did happen, Mr Cameron would face Labour accusations of betraying old people.