40,000 families could be left homeless if the Government goes ahead with changes to benefits.
The warning comes in a leaked letter from a top advisor to the Prime Minister, apparently seen by The Observer newspaper.
The letter, from Communities Secretary Eric Pickles’s private secretary to his opposite number in the Prime Minister’s office, will be deeply embarrasing to the coalition.
It suggests that the estimated £270m saving from the cap may end up as a net loss, because 40,000 people could be made homeless.
In addition, it suggests, half the 56,000 affordable homes the Government expects to be constructed by 2015 will not be built because developers will not be able to recoup enough money from tenants.
Both Downing Street and the Communities department have already mounted a damage limitation exercise.
Officials are pointing out that the letter was written nearly seven months ago and that Mr Pickles has never raised the matter in Cabinet.
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 £21bn a year under Labour.”
And a Downing Street spokesman said: “The entire Government is behind the policies on welfare and housing benefit.
“The bill has been growing enormously in recent years and needs to be tackled.”
Nonetheless, Labour will seek to capitalise on what it sees as confusion and division at the heart of Government.
Shadow work and pensions secretary Liam Byrne is quoted by the newspaper as saying: “We were assured by ministers that costs wouldn’t rise. Now top-level leaks reveal the truth.”
And charities for the homeless and children are saying the leaked letter is an affirmation of the case they have been making all along – that the cap will do vastly more harm than good.
Although the Government will hope to contain the row, it has faced repeated setbacks culminating in u-turns in recent months.
If nothing else, it will face severe scrutiny by newly-emboldened critics in the coming days.
And, as a result of this disclosure and the row in prospect, some measure of flexibility in the benefit cap cannot be ruled out.
I've checked the figures with Whitefriars and the City housing dept and found that if (say) middle-aged people now living on their own are forced to look for smaller private accommodation, it will cost the government and the taxpayer more in Local Housing Allowance than it does at present in Housing Benefit.
What is worse is that the money will be paid direct to the tenant and not to the Housing Association as it is at present with no guarantee that it will ever be passed-on to the landlord. For that reason many private landlords now refuse to accept tenants in receipt of Local Housing Allowance.
