By Jason Douglas 

LONDON--U.K. Treasury chief George Osborne on Wednesday announced he was scrapping unpopular plans to cut tax rebates for working families in the face of widespread opposition but said he remains on course to meet his goal of eliminating Britain's budget deficit.

The U-turn on so-called tax credits, payments to low-income households, follows a political row that dented Mr. Osborne's reputation for political nous and led to a bruising defeat for the government in the House of Lords, Parliament's upper chamber.

Presenting his annual autumn statement on his tax and spending plans to Parliament, the Chancellor of the Exchequer said he had "listened" to critics of his planned tax-credit cuts. And, he said because of improvements in Britain's public finances, he decided "the simplest thing to do is not to phase these changes in, but to avoid them altogether," according to Mr. Osborne.

The tax-credits row was a blow for Mr. Osborne, who is seen as a likely successor to his close political ally Prime Minister David Cameron. Mr. Cameron has said he would stand down before the next election in 2020 and named Mr. Osborne among potential heirs.

Since Mr. Cameron's Conservative Party returned to power in May, Mr. Osborne has taken on a broader role in government on top of his duties as finance minister. He led a delegation to China in September and is one of the key negotiators in Mr. Cameron's drive to reshape Britain's relationship with the European Union, ahead of a referendum on continued membership due before the end of 2017.

Mr. Osborne on Wednesday sought to justify cuts to other areas of government spending--including the departments responsible for business, local government and energy--by linking a healthy economy to national security. Among the few areas that will see an increase in funding over the five-year Parliament are intelligence agencies and the defense budget, with the policing budget protected from cuts, reflecting British concern at the rise of Islamic State in Syria and Iraq and the threat it poses closer to home.

Critics say he took a political misstep in trying to push ahead with his plans to cut tax credits in the face of widespread opposition, including from within his own party.

Last month, Britain's unelected upper chamber refused to approve his plans, the first time the House of Lords has voted against the government on a tax and spending matter in more than a century.

The tax-credit cuts had been due to come into effect in full next year, a change that according to some estimates could have cost families receiving the payments more than GBP1,000 a year ($1,419) on average.

Now, the payments will be phased out gradually over the next five years alongside the introduction of other measures to lift the incomes of working families. Mr. Osborne's change of heart will cost the treasury almost GBP4 billion in 2016, according to its own estimates.

"Nobody minds a U-turn skilfully executed," said Tim Bale, a politics professor at Queen Mary University of London. "I don't think this does him anywhere near as much damage as clinging on to something that clearly was going to cause the party a lot of problems."

But Rodney Barker, emeritus professor of government at the London School of Economics, said the episode underscores the difficulty the Chancellor has in delivering the remainder of his austerity drive without hurting ordinary voters--potentially denting his chances of succeeding Mr. Cameron.

"He has probably been weakened as a result of this," he said.

Mr. Osborne's reversal will be financed by healthier corporate and personal tax receipts over the next five years as well as an increase in some other taxes and lower interest payments on the U.K.'s debt, according to the Office for Budget Responsibility, the U.K.'s fiscal watchdog.

The OBR's forecasts Wednesday showed that Mr. Osborne is still on course to achieve his goal of pushing Britain's public finances into surplus by 2020. The agency forecasts a surplus of GBP10.1 billion in the fiscal year ending March 2020, and a surplus of GBP14.7 billion the year after.

Mr. Osborne's broad plans are designed to close a budget deficit that is currently around 5% of national income, down from more than 10% when he first took office in 2010. He initially aimed to eliminate the deficit entirely by this year but his plans were blown off course by weaker-than-expected growth.

Jon Sindreu

contributed to this article.

Write to Jason Douglas at jason.douglas@wsj.com

(END) Dow Jones Newswires

November 25, 2015 13:05 ET (18:05 GMT)