Following the government’s embarrassing defeat on the proposed tax credit cuts in the House of Lords yesterday, the Conservatives are planning to curtail the powers of the Peers. Both the chancellor and David Cameron said the defeats have raised a “constitutional issue” which they were determined to tackle.

A Downing Street spokesman has said: “The prime minister is determined we will address this constitutional issue. A convention exists and it has been broken. He has asked for a rapid review to see how it can be put back in place.”

Yet even Lord Lawson, the former Conservative chancellor, voiced that he was struggling to support the tax credit cuts and he called on Osborne to do more to help low-income earners. He said: “Here a great deal of the harm is at the lowest end, and that is what needs to be looked at again. That is what concerns me.”

He added: “It is not just listening which is required [from the government] but change.”

The Clerk of the Parliaments has confirmed that Commons financial privilege does not extend to statutory instruments. Many Peers pointed out throughout the debate that welfare policy isn’t “budgetary.”

But on Tuesday, Downing Street will outline plans for a “rapid review”, which will examine ways to secure the “supremacy of the House of Commons on financial matters and secondary legislations, after the prime minister accused peers of “breaking a constitutional convention.” A furious Cameron is planning to set limits on the power of the House of Lords after George Osborne suffered a major and humiliating blow yesterday, when Peers voted to delay tax credit cuts in order to protect those who would lose out.

The Upper House voted in favour of a motion by the former Labour minister Lady Hollis to halt the cuts until the government has responded to new evidence regarding the likely negative impact of the cuts on protected social groups, and produces a scheme to compensate low-paid workers for three years. 

Baroness Lister pointed out that no impact assesment was carried out regarding the cuts, and said “the Bill is an example of none evidence-based policy making. She said “It betrays lack of understanding of policy and people’s lives,” and added “getting an impact assessment from the government is like pulling teeth”.

Lord Campbell observed during the debate that because of the Conservative’s pre-election lies, and because the public were deliberately mislead by several statements from the Tories, saying there would be “no cuts to tax credits,”  that “constitutional convention and niceties are not a priority.”

Meanwhile, George Osborne has indicated he will seek to calm tensions by softening the impact of the planned cuts which have been put on hold by the vote in the Upper House. In language that reflected some of the motion, he told the BBC he would help people struggling in the “transition” period when he delivers his autumn statement on 25 November.

He said: “Unelected Labour and Liberal Lords have defeated a financial matter passed by the elected House of Commons, and David Cameron and I are clear that this raises constitutional issues that need to be dealt with. However, it has happened and now we must address the consequences of that. I said I would listen and that is precisely what I intend to do. I believe we can achieve the same goal of reforming tax credits, saving the money we need to secure our economy while at the same time helping in the transition. That is what I intend to do at the autumn statement.”

The “rapid review” will establish ways of guaranteeing that “financial measures” cannot be overturned by the House of Lords despite the fact that Labour successfully argued that because the tax credits were being introduced through a statutory instrument and had not been declared as a formal financial measure, the move in the Upper House was justified. The review will examine ways of guaranteeing that statutory instruments cannot be overturned by the Lords, who have only done so on five occasions.

Downing Street and Treasury officials spoke after Hollis’s motion was passed by 289 to 272 votes. Peers also voted in favour of a milder motion by the crossbench Peer Lady Meacher – by 307 to 277 votes – that also declined to support the cuts until the government responds to the Institute for Fiscal Studies analysis of the negative impacts of the Bill. A fatal motion, tabled by the Liberal Democrat Peer Lady Manzoor, would have halted the Bill, but it was defeated by 310 votes to 99.

During the Lords debate, Baroness Smith said that 60% of the population want to see a u-turn on this policy. She also points out that the original Labour tax credit legislation wasnt subject to financial privilege. She also said that the government truncated the legislative process to introduce a wide reaching and radical change of policy, to avoid a degree of scrutiny. Baroness Hollis urged peers to support the working poor, not government. She argued that the Commons votes were taken based on incomplete evidence.

John McDonnell, the shadow Chancellor, said: “George Osborne has got to think again. He has been defeated twice in the House of Lords tonight, but there are a large number of Conservative MPs as well who have been telling him very, very clearly he has got to think again.”

Just hours before the Lord’s debate, fresh evidence emerged of the potential impact of the tax credit changes on low-paid employees.

Policy in Practice, a welfare-to-work consultancy, calculated that some workers will be able to keep just 7p in every extra £1 they earn, effectively putting them on a 93 per cent marginal tax rate.

The report concluded the overall package of measures – including raising the national minimum wage and increasing the tax allowance – would leave two-thirds of claimants worse off and warned that owner-occupiers would be worst affected.

The calculations were revealed by the Conservative-supporting Spectator, which has urged a rethink of the policy that has been likened to the poll tax.

A 38 Degrees campaigner outside the Houses of Parliament. An online campaign sought to drum up support among members of the Second Chamber to vote against motion.