The Osborne Ultimatum: Chancellor’s benefits freeze bombshell will affect ten million households

A two-year freeze in working-age benefits will save £3bn, but critics – including Lib Dems – question whether this is the fairest way to fix the deficit

Chancellor George Osborne got a standing ovation from the Tories for a package of tough measures (Getty)

George Osborne provoked a storm of controversy today by announcing a two-year freeze in most working-age benefits, while declining to hit the rich and exempting pensioners from his latest welfare cuts.

The Chancellor won a rapturous ovation at the Conservative Party conference in Birmingham but his measures were disowned by the Liberal Democrats and attacked by anti-poverty groups.

Most benefits, including child benefit, tax credits, jobseeker’s allowance, housing benefit and income support will be frozen in April 2016 for two years if the Tories remain in power, to save £3.2bn. They are currently rising by 1 per cent a year after the Lib Dems blocked Mr Osborne’s previous proposal for a freeze. Payments to pensioners, the disabled and carers and statutory maternity pay will be exempt.

The Chancellor’s gamble is a calculated one. He believes the measure will be popular with natural Conservatives, including some who have drifted off to Ukip. But it emerged that of the 10 million households affected, about 5 million will be in low-paid work and receiving tax credits – hardly the so-called benefit scroungers normally in the Tories’ sights.

A joint-earning couple with one child, both earning £13,000 a year, would be £354.20 a year worse off through the loss of child benefit and tax credits. A family with two children and one earner on £25,000 would be £495 a year worse off.

The move highlighted the all-powerful Chancellor’s pivotal role in the Tories’ attempt to win another term in office – and his determination to put the deficit at the heart of next May’s general election.

His aides admitted the move would be controversial and challenged Labour to say whether it would back it or raise taxes or borrowing instead. But critics accused Mr Osborne of sparing pensioners because they are more likely to vote than any other age group.

The Lib Dems would veto the benefits freeze if they remain in coalition with the Tories. “We know there must be some welfare savings but they should not come from this group,” said one Lib Dem source. “The gleeful elements of the Conservative Party will turn off a lot of people. It speaks volumes about the priorities of the Conservatives that they see benefit cuts for the working-age poor as a crowd-pleasing punchline for a conference speech.” Mr Osborne argued that the British people could no longer afford to live in a country which spent £100bn a year on welfare payments for working-age people.

Urging voters to “choose the future, not the past” at next year’s election, the Chancellor said the benefits freeze would make a “serious contribution” to eliminating the deficit over the next Parliament.

“This is the choice that Britain needs to take to protect our economic stability and to secure a better future,” he said. “The fairest way to reduce welfare bills is to make sure that benefits are not rising faster than the wages of taxpayers who are paying for them,” he said. “We will provide a welfare system that is fair to those who need it, and fair to those who pay for it, too.”

Although the Coalition has already found £100bn of cuts, Mr Osborne claimed the Treasury’s latest estimates showed that eliminating the deficit required another £25bn of savings or new taxes – a figure which some Whitehall officials regard as out of date. He wants £12bn of that found from welfare and so has another £8.8bn to find.

Iain Duncan Smith, the Work and Pensions Secretary, announced that the Tories would bring in a trial scheme after the election to pay benefits on “smartcards” so claimants could not blow them on alcohol or gambling and could only buy food and other essentials. A Lib Dem source warned that would “stigmatise” claimants.

The Chancellor announced that £13bn of his £25bn of post-election cuts would be found by maintaining the squeeze on Whitehall departmental budgets. The Tories would “go on restraining public-sector pay”, where rises are currently capped at 1 per cent.

Yesterday, the Royal College of Midwives announced that its members would strike over pay for the first time in its 133-year history. Midwives and maternity support workers will stage a four-hour stoppage on 13 October. Mr Osborne also unveiled what was dubbed the “Google tax” as he promised to stop multinationals diverting profits offshore to avoid corporation tax.

Chris Leslie, the shadow Chief Treasury Secretary, said: “Labour will balance the books as soon as possible in the next Parliament, but we will do so in a fairer way. We will reverse the Tory tax cut for millionaires, stop paying the winter fuel allowance for the richest 5 per cent of pensioners and cap child benefit rises at 1 per cent for two years.”

Critics of Mr Osborne voiced their concerns that low-income families in deprived areas would be the ones hardest hit (Getty)

Alison Garnham, chief executive of the Child Poverty Action Group, said the benefits freeze would be bad news for working parents struggling on low wages and already coping with rising living costs and previous benefit cuts. “A couple both working full time on the minimum wage are nearly a fifth short of the money they need for basics; another freeze will make it a whole lot harder for them,” she said.

Matt Downie, director of policy and external affairs at Crisis, said: “Further cuts to housing benefit would be cruel and counter-productive. Homelessness shatters lives and it is hugely costly to the public purse to help people put the pieces back together. It is far better if they never have to go through it in the first place.”

Julia Unwin, chief executive of the Joseph Rowntree Foundation, said: “The plan to freeze welfare for two further years will make things worse for our economy, with more people living below the poverty line leading to lower tax revenues and the wasted potential of millions. The economy is beginning to recover, but for people on low incomes, the forecasts are heading in the wrong direction.”

Frances O’Grady, the TUC General Secretary, said: “In today’s low-pay Britain, in-work benefits are a lifeline for millions of families. Working families have already been hit by three-quarters of the total cuts the Government has made to welfare and now the plan is to put them in the front line again.”

Fiona Weir, chief executive of Gingerbread, which represents single parents, said: “Freezing benefits paid to people coping on low incomes, such as working tax credits, means making some of the poorest in society bear the brunt of cuts. This new cut would put intolerable pressure on those who have already been hit disproportionately by the recession and public spending cuts.”