Blairite former minister John Denham has warned that Labour will have to spend more on pensions if the looming savings crisis is to be averted.

He said that "increased tax and national insurance" would be required.

The warning comes amid signals that the prime minister has been persuaded of the case for higher state spending on pensions.

Speaking in Budapest Tony Blair said the government would "probably have to spend more" to fund pensions.

He added: "But that will mean we will have to spend less on areas, particularly people who could work but languish on benefit."

Treasury officials stress the high cost of a more generous state system and insist no decision will be made before the election.

A source close to the chancellor told the Mirror: "The point is you have got to target help at the poorest and the pension credit is the only way to do it.

"What alternative is Number 10 coming up with? The answer is nothing. This is turning into a real flashpoint."