A top-level leak reveals deep concerns over Treasury plans to limit total household benefits to £500 a week. Ministers fear the move could force tens of thousands of people out of their homes.

Eric Pickles

A leaked letter has revealed that ministers fear cuts to welfare payments could make 40,000 families homeless.

The letter, from the private office of Communities Secretary Eric Pickles, warns that the cost of rehousing people who have their benefits slashed could outweigh the savings.

Mr Pickles' private secretary Nico Heslop warns that Chancellor George Osborne's plans to cap total household benefits at £500 a week from 2013 raised "some very serious practical issues" for the Department for Communities and Local Government (DCLG).

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.

"We are concerned that the savings from this measure, currently estimated at £270 million from 2014-2015, does not take account of the additional costs to local authorities (through homelessness and temporary accommodation). In fact we think it is likely that the policy as it stands will generate a net cost."

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. Nico Heslop

Mr Heslop goes on to say that proposed welfare cuts will also put at risk at least half of the 56,000 affordable rental homes that the Government hopes will be built by 2015.

There are fears contractors may doubt whether they will be able to recoup their costs from tenants, and "reductions would disproportionately affect family homes rather than small flats", the letter adds.

It was written by Mr Heslop to his opposite number in 10 Downing Street and obtained by The Observer, but DCLG have declined to discuss whether it was seen or approved by Mr Pickles before being sent to the Prime Minister's office.

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

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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."

Health Secretary Andrew Lansley said: "Nobody thought it was fair that people on benefits could live in properties and have rent paid for them that were far in excess of the rents paid on properties that people who were taxpayers are living in.

"We have got to arrive at a situation where people who are in work see the benefits of being in work and it pays to be in work."

Shadow work and pensions secretary Liam Byrne said: "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."

Campbell Robb, chief executive of homelessness charity Shelter said: "With 21 per cent of people struggling to meet housing costs, it's naive to think you can cut support without putting some people at risk of losing their home.

"Our services are seeing increasing demand as people are hit by the first wave of changes to housing benefit and yet Government hasn't looked to change any of it's proposed reforms.

"The coalition Government should stop bulldozing through badly thought through policies whilst ignoring independent evidence, its own expert panel and the views of those who will deal with the very real impact on people."