Benefits could be frozen in next round of cuts

Some state benefits could be frozen next April under a Coalition trade-off being discussed by senior Cabinet ministers as they draw up a new round of welfare cuts.

The likely casualties would be Jobseeker's allowance for the unemployed and income support for the poor. The idea is gaining support in talks between David Cameron and George Osborne and their Liberal Democrat deputies, Nick Clegg and Danny Alexander, on the Chancellor's autumn statement, due on 5 December.

Iain Duncan Smith, the Work and Pensions Secretary, who is joining the so-called "Quad" for some of its sessions, is said to be prepared to agree to a benefits freeze. In an interview in September, Mr Clegg rejected Mr Osborne's initial proposal for an across-the-board freeze in benefits lasting two years.

But the Deputy Prime Minister is now showing more flexibility and is ready to allow some payments to be held at their current level if, in return, Mr Osborne hits the rich through a form of wealth tax to ensure the pain of the cuts is shared fairly.

Mr Osborne, who is seeking an extra £10bn of welfare cuts, says the 5.2 per cent rise in most benefits from this April proved generous as inflation fell. He points out that many people in work have had no or low pay rises this year.

Mr Clegg has argued that the deficit cannot be balanced on the backs of the poor. But he has acknowledged that the welfare budget cannot be immune from the drive for further savings across Whitehall, which are needed to tackle a bigger than expected deficit.

Normally, benefits would rise by 2.2 per cent next April, in line with the consumer prices index this September. Mr Clegg may sanction a freeze or below-inflation increase in some benefits if the Tories agree to raise taxes on homes worth more than £1m. Mr Osborne has rejected the Liberal Democrat plan for a mansion tax, so Mr Clegg is pressing for new council tax bands at the upper end of the property scale. He has won the support of some Tory backbenchers but is opposed by Eric Pickles, the Communities Secretary.

Other options include higher stamp duty on expensive homes, which would be more acceptable to many Tories than a council tax rise, and curbs on tax relief on pension contributions by the better off, which is Liberal Democrat policy but is opposed by many Tories.

If a deal is reached, ministers are unlikely to freeze payments for disabled people so soon after the Paralympics. And the basic state pension is protected by a formula that will increase it by 2.5 per cent next April, to £110.13 a week for a single person and £176.14 for a couple.

"The two parties are still staking out their ground," one Whitehall source said. "There is a possible trade-off between benefits and taxes for the rich."