Welfare cuts cast doubt on Coalition's claim of fairness

George Osborne imposed a further £7bn cut in the welfare budget to blunt the axe falling on frontline services, but insisted that yesterday's government-wide spending review was "fair" as well as "tough".

Only £2.5bn of the welfare savings will come from the better-off, through withdrawing child benefit for top-rate taxpayers, with the rest found from restricting benefits for the poor and vulnerable groups.

The most controversial change is that one million sick and disabled people judged capable of returning to some work in future will have a one-year time limit placed on their claims for employment and support allowance. They could be left £50 a week worse off.

The move, coming on top of £11bn of welfare cuts announced in June, threatened to undermine the Coalition Government's claim to have spread the pain fairly across all the income groups. Critics also seized on Treasury figures suggesting that the poorest 10 per cent of the population would be worse hit by yesterday's tax and benefit measures than any group except the top 10 per cent. And there were claims that £1.7bn of the Liberal Democrats' £2.5bn-a-year "pupil premium" for disadvantaged children would be found from other parts of the education budget.

Ministers insisted that the package was progressive when the usage of public services was taken into account. But Carl Emmerson, acting director of the Institute for Fiscal Studies (IFS), said the bottom half of the income scale would be hit harder than the top half on both income changes and service provision. Overall, the new measures announced yesterday "do look regressive", he said.

More than 5 million people will be affected by the Chancellor's decision to increase eligibility to start claiming the state pension to 66 in April 2020. This will eventually save the Government £45bn. The equalisation of state pension age for men and women at 65 will be brought forward to 2018.

Public-sector workers will be hit hardest. They face a 3 per cent rise in their pension contributions, to save the state £1.8bn annually, a decision that could provoke industrial action. The blow comes on top of a two-year wage freeze for public employees and 490,000 job cuts confirmed yesterday.

These cuts eased the pressure on the schools and science budgets and spending on transport schemes. But central government grants for the police will fall by 20 per cent, one of many areas where local authorities will be asked to make up the shortfall or impose deep cuts. Rail fares will rise by 3 per cent on top of inflation from 2012.

According to the IFS, the protection given to schools, hospitals and defence means the four-year cuts package will hit state support for higher education teaching, social housing, the Department for the Environment, the Ministry of Justice and local government. The IFS said that the measures represented the deepest cuts since the 1970s, rather than the Second World War as previous government plans had implied, after Mr Osborne reduced the cuts from £83bn to £81bn.

He dropped a plan to end child benefit at 16 rather than 19, after the Treasury calculated that the decision to scrap it for families with a top-rate taxpayer would save £2.5bn annually, rather than the £1bn originally announced. Mr Osborne, who allocated an extra £560m a year in child tax credits, said his package would not increase child poverty.

Tory MPs had been told by party whips not to cheer the cuts too loudly. The message was that the cuts were a grim necessity, not something to enjoy or do with ideological zeal. But they could not resist cheering the Chancellor to the rafters after he ended his 62-minute Commons statement with a coup de theatre.

Treasury officials beavered away and managed to make his figures add up to an average 19 per cent for departments other than Health and International Development, whose budgets were protected. That was not only lower than the 25 per cent figure Mr Osborne trailed in his June Budget. Crucially, it was less than the 20 per cent cuts implied in the outgoing Labour government's plans. The statistic also steadied Liberal Democrat nerves and added to the pressure on Labour to say where it would cut.

Mr Osborne declared: "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt. It is a hard road, but it leads to a better future." He added: "To back down now and abandon our plans would be the road to economic ruin. We will stick to the course. We will secure our country's stability. We will not take Britain back to the brink of bankruptcy."

But Alan Johnson, the shadow Chancellor, warned that the Government's "reckless gamble" risked stifling the fragile recovery. "We believe we can and should sustain a more gradual reduction, securing growth," he said.

Most Liberal Democrat MPs did not rock the Coalition's boat but Simon Hughes, the party's deputy leader, reacted cautiously. "There will be difficult times ahead in many households and communities and it would not be right to jump to conclusions about what the effect of today's decisions will be either nationally or locally," he said.

Andy Burnham, the shadow Education Secretary, claimed the package was unravelling because the much-vaunted "pupil premium" was "a complete con". He said: "Far from being outside of the schools budget as the Coalition Agreement promised, we find out today that it is to be recycled from within it, creating huge winners and losers among schools."

But the Department for Education insisted: "Schools budgets have not been cut to pay for the premium. The spending review grows the school budget at 0.1 per cent in real terms in each year of the spending review. Underlying per pupil funding will be maintained in cash terms."

The Local Government Association said yesterday's measures would "hit councils and the residents they serve very hard and will inevitably lead to cuts at the front line".