Osborne's U-turn on tax credits unlikely to hurt UK welfare push

By William James LONDON (Reuters) - Chancellor George Osborne's U-turn decision not to cut state support for low-income workers will provide short-term relief for many households across Britain, but is unlikely to dent his broader attempt to rein in welfare spending. Osborne announced on Wednesday he was dropping his unpopular plan to reduce tax credits for many households, saying a better outlook for the public finances gave him the scope to make more gradual savings. "I've listened to the concerns. I hear and understand them," Osborne told parliament during a half-yearly budget update. Britain's welfare system for low-paid workers is being revamped and tax credits are due to be largely phased out by 2020 and replaced with a new system called universal credit and more generous minimum wage rates. Osborne had wanted to curb tax credits sooner but his plan ran into opposition even within his Conservative Party and raised questions about his chances of succeeding Prime Minister David Cameron. Osborne's decision to drop the tax credit cuts means he will breach a legal cap which he himself introduced on the amount the country can spend on social security payments for each of the next three financial years. The government has to seek approval from parliament to breach the cap, potentially setting up an uncomfortable debate on welfare policy. The opposition Labour Party's new left-wing leader Jeremy Corbyn was elected on a mandate to challenge the government's welfare cuts. Labour said the overall welfare cuts would still hurt working families. "This is a smoke-and-mirrors spending review from George Osborne, leaving working people worse off and failing to address the big challenges facing the country," said Labour's welfare spokesman Owen Smith. The budget update showed Osborne would still hit his target to lower the annual welfare bill by 12 billion pounds by 2020 without relying on major new cuts because the tax credit benefit is due to be largely replaced with a less generous system. His original plan would have been only a temporary benefit to the public finances and scrapping it will not significantly affect the situation at the end of the decade, when previously announced reforms to other benefits would make up almost all the 12 billion-pound saving. Osborne also announced plans to limit the amount that could be paid in housing benefits for new applicants, and to stop housing and top-up pension payments to people who have left the country for more than a month. These measures were expected to account for around 235 million pounds annually by 2020/21. (Editing by Elizabeth Piper and William Schomberg)