03/07/2011 05:18 BST | Updated 01/09/2011 06:12 BST

Government Welfare Tensions Revealed

David Cameron has received a stark warning from within his own administration that the coalition Government's plans to cut welfare payments risk making 40,000 families homeless.

The warning came in a letter from the private office of Communities Secretary Eric Pickles and appears to reflect deep concern in his Department for Communities and Local Government (DCLG) over the plan to cap total household benefits at £500 a week.

Written by Mr Pickles' private secretary Nico Heslop to his opposite number in 10 Downing Street and obtained by The Observer, the letter warns that the estimated £270 million annual savings from the plan could be wiped out by the cost to local authorities of rehousing families who can no longer afford to pay for their accommodation. Far from contributing towards the Government's deficit reduction programme, the scheme could end up generating a "net cost" to the Exchequer.

And it warns that the welfare cuts will put at risk at least half of the 56,000 affordable homes to rent which the Government hopes will be built by 2015, as contractors doubt whether they will be able to recoup their costs from tenants.

A spokesman for Mr Pickles said: "We are fully supportive of all the Government's policies on benefits. Clearly action is needed to tackle the housing benefit bill which has spiralled to £21 billion a year under Labour."

It is understood that the letter was written in January and has not been discussed at Cabinet level.

But sources within the DCLG declined to discuss whether it was seen or approved by Mr Pickles before being sent to the Prime Minister's office.

In the letter, Mr Heslop warned that the benefit cap announced by Chancellor George Osborne last October and due to come into effect in 2013 raised "some very serious practical issues for DCLG priorities".

He added: "Our modelling indicates that we could see an additional 20,000 homelessness acceptances as a result of the total benefit cap. This on top of the 20,000 additional acceptances already anticipated as a result of other changes to the housing benefit. We are already seeing increased pressures on the homelessness services."

Shadow work and pensions secretary Liam Byrne told The Observer: "We were assured by ministers that costs wouldn't rise. Now top-level leaks reveal the truth. Iain Duncan Smith has promised the House of Commons he will not U-turn on the benefits cap. Perhaps now David Cameron will order him to think again."