Tories seek further cuts as public sector staff get pensions warning

The Government will seek even deeper cuts in welfare than those announced in the Budget in order to protect frontline public services, George Osborne said yesterday.

The Chancellor will invite cabinet ministers to suggest specific cuts in the £180bn-a-year welfare system once they have settled their departmental budgets in negotiations with the Treasury during the government-wide spending review to be completed by October. As an incentive to find savings in their own area, ministers who reach early agreement will win a seat on a new cabinet "star chamber" which will make the final decision on the cuts.

Some £11bn was pruned from welfare in the Budget, including curbs on tax credits, a three-year freeze in child benefit, a squeeze on housing benefit and a new formula for lower annual rises in most state benefits.

Mr Osborne made clear yesterday that he wanted to go further. No decisions have been taken, but this could mean curbs on winter fuel allowances, free bus passes and television licences for better-off pensioners – even though the Tories promised not to cut them at last month's election. Other options would include a further squeeze on benefits, child benefit and tax credits.

Deeper welfare cuts would reduce the average 25 per cent cut over four years in departments other than health and international development, which are protected. "If over the coming months we can find further savings in the welfare figure, then we can bring that 25 per cent number down," Mr Osborne said yesterday.

He added that the review might involve the Government halting some programmes completely. "You also have to ask bigger questions about certain functions that the state can no longer perform," he said.

Last night David Cameron and Nick Clegg got a taste of the likely public anger over cuts when they took questions from voters in a BBC Face the Audience programme. It was a contrast to their first appearance in a light-hearted press conference in Downing Street's garden after the coalition was formed.

The Prime Minister confirmed that public sector workers could have to pay more into their pension pots. He said any reforms would not affect "accrued rights" but that "there may be changes to pension arrangements that affect existing employees".

Mr Cameron, who announced that he would not draw his £66,000-a-year Prime Minister's pension when he left Downing Street, conceded that the two-year pay freeze for most public-sector workers was an effective pay cut. "I totally accept that. I'm not trying to hide it from you," he said.

"We have a choice. We either have to have pay restraint ... or we're going to lose jobs, and I think it is better to ask people in the public sector who work very hard, whose work we value, but to say we've got to have two years of this pay restraint in order to hold on to jobs."

Last night Mr Cameron and Mr Clegg invited all public employees to suggest ideas for savings so the state could do "more for less". In a letter to six million workers, they said: "We want you to help us find those savings, so we can cut public spending in a way that is fair and responsible."

Liberal Democrat jitters over the rise in VAT and the looming cuts emerged yesterday. Baroness Tonge, a former Liberal Democrat MP, said: "VAT and cuts in benefits are very retrograde so I am very, very worried." She added: "I don't see how we can cut benefits and then have 25 per cent cuts in public services, which is where those people on benefits would be likely to get work."

Simon Hughes, the Liberal Democrats' deputy leader, admitted the party would have liked the Budget to have gone further on raising capital gains tax and income tax thresholds but insisted it had "fought our corner".