The idea was mooted in a consultation document and involved an expansion of the social fund so that it no longer offered interest-free emergency loans but used credit unions which can charge interest rates of up to 27 per cent.
Following weekend press reports on the consultation and attacks by the Conservatives, welfare minister Kitty Ussher ruled out the measure.
Before the Government U-turn, Conservative Shadow Work and Pensions Secretary Chris Grayling said: “These proposals are simply outrageous. Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the Government’s answer is to propose abandoning interest free emergency loans, and start charging 27 per cent a year instead.
“Gordon Brown and James Purnell are behaving like loan sharks. If they press ahead with these plans, there will be a huge row in Parliament, and rightly so.”
A Department of Work and Pensions spokesman said: “It is entirely legitimate to consult on options, but it is important not to let linger in the air something the government is not going to implement.
“We are not going to be charging people on benefits interest on social fund loans.
“We will continue to explore how we can extend access to the social fund to more people, and how we can improve the service it offers.”