Conservatives could cut another £12bn from welfare budget

A Conservative government could cut another £12bn off the welfare budget, George Osborne has suggested as he insisted that further savings on benefits would be needed to clear the deficit.

The Chancellor drew a clear and deliberate dividing line with Labour and the Liberal Democrats as he mapped out his strategy for the period beyond the 2015 general election. Mr Osborne insisted that whoever is in power will have to impose significant reductions to welfare. Although the other two main parties are likely to accept limited cuts in this area, they would not be on the scale contemplated by the Tories.

Mr Osborne told the Commons Treasury Select Committee: “My view is welfare expenditure cannot be excluded from difficult decisions that need to be made. If you want to maintain the same pace of reduction in government spending that we have had over this parliament, rather than accelerating it, then you are going to have to find billions of pounds of welfare savings. I think that is what this country needs to do. Personally I think if it comes to a choice we should be making our investment in schools and in science, because that's securing the long-term economic health of this country and we shouldn't be cutting those things because we are not prepared to deal with the welfare budget.” He also promised to prioritise the health budget.

The Chancellor was challenged over a calculation by the independent Institute for Fiscal Studies that £12bn of welfare savings would be needed to protect services. He replied: “I don't want to put a number on it, but I agree with the analysis behind that number, that many billions of pounds of welfare savings are going to be required if we want to avoid cutting government budgets any further than they have been.” He added: “Anyone who wants to be honest with the British public about dealing with the deficit and making sure we retain public services of sufficient quality should also be honest about the welfare savings that are required.”

Mr Osborne also hinted that he might be prepared to bow to pressure from some Tory MPs to lower the £26,000-a-year cap on benefit claims by one family. He admitted that any change to it would be the subject of “fierce debate” inside the Coalition. Later senior Lib Dems confirmed the Nick Clegg would not sanction a lower cap before the election, saying that would be “premature” because the ceiling had only taken effect this year.

Mr Clegg backed a controversial rise of only 1 per cent in many benefits for three years but has ruled out further welfare cuts before the election on the grounds that the Tories will not curb perks such as winter fuel allowances and free bus travel and TV licences for better off pensioners.

Mr Osborne's tough message on post-2015 welfare savings is another example of how the two coalition parties are diverging ahead of the election. It threatens to provoke a clash with Danny Alexander, his Lib Dem deputy at the Treasury, with whom he enjoys a close working relationship. The Chief Treasury Secretary, writing on The Independent's website this week, warned that “some Conservatives are ideologically wedded to continuous cuts as the route to a smaller state” and insisted the Lib Dems did not support that.

Tory strategists believe that further welfare cuts are a potential vote winner in 2015. Tory ministers have toned down their earlier rhetoric suggesting that benefit claimants are “scroungers” rather than “strivers” amid fears of a backlash, especially in the North. But they insist that many voters will support more “carrot and stick” welfare reforms to encourage jobless people to work and help to “finish the job” of eliminating the deficit by 2019. “It plays very well in marginal seats,” said one Tory aide.

Mr Osborne, who announced that next year's Budget will be held on March 19, was asked whether he agreed with the Office of Budget Responsibility's analysis that it was “inconceivable” that household incomes had not been falling since the financial crisis. He replied: “I agree that what happened in 2008 has made this country a lot poorer. I accept that. What I would say is that the way to make the country richer is to stick with the economic plan that has helped us recover from that economic calamity.”