Government denies Tory loan claims

The proposal to charge up to 2% a month - the equivalent of almost 27% annually - for loans available to people on benefits under the Government's social fund was included in a consultation paper issued last month under the signature of Work and Pensions Secretary James Purnell.

Conservatives accused the Government of acting like loan sharks, while Labour MPs, unions and charities expressed dismay. Labour's former leader Lord Kinnock said there was "no justice" in the proposal.

Work and pensions minister Kitty Ussher hastily announced that ministers had ruled out the change, even though the consultation does not officially end until Tuesday.

She insisted the Government's aim was to make emergency credit more easily available to vulnerable households, in order to avoid them turning to loan sharks charging as much as 1,000% in interest.

Ms Ussher said that the Government wanted to enter into partnerships with local credit unions, which offer loans at interest capped at 2% a month. But she insisted that any state loans provided through them would be interest-free.

She said that she would like to see rules governing the loans relaxed, so that applicants could borrow state money to buy their children Christmas presents, as well as for urgent and essential expenses like repairing a broken boiler. The social fund pays out around £500 million a year to low-income households unable to access credit from mainstream sources.

The DWP document proposed allowing credit unions to take over responsibility for providing the loans, and suggested that interest could be charged "at affordable rates" in order to cover the cost of other services, such as savings accounts and financial advice.

Charging interest would add £47.80 to the cost of the average budgeting loan of £433.30, which would take four weeks longer to pay off as a result, it said.

Shadow work and pensions secretary Chris Grayling wrote to Mr Purnell demanding he ditch the "outrageous" plan. He said: "I just don't understand why on earth the Government would come up with a plan like this in the middle of a recession, when unemployment is rising by thousands each week.".