Spending review: George Osborne targets benefits and slashes public sector jobs

Chancellor unveils unexpected package of welfare measures that include extension of wait before unemployed can sign on
George Osborne conjured up a populist crackdown on welfare and public sector pay on Wednesday as he sought to minimise the impact of a further £11.5bn of spending cuts, including £2.6bn taken from council budgets and £500m axed from education.

Unveiling the results of his spending review 2015-16, the chancellor claimed that it would be possible to achieve £5bn of the sought-after savings through efficiencies, although this will include the loss of a further 144,000 public sector jobs. Police, student grants and charities will also be hit.

Claiming the economy was moving from rescue to recovery, Osborne set out a fifth and unscheduled year of austerity. “We have to deal with the world as it, not as we wish it to be, so this country has to continue to make savings,” he said. “If we abandoned our deficit plan, Britain would be back in intensive care.”

In a bid to grab headlines and push Labour into a corner ahead of the 2015 election, Osborne announced an unexpected package of welfare reforms and confirmed he was ending automatic pay rises for employees in the public sector.

The chancellor said he was extending the current three-day wait before the jobless can claim benefits to seven days. He also said he would require jobseekers to attend jobcentres every week, rather than fortnightly, and order lone parents with children aged three and four to prepare for work. People will also be required to attend English language classes as a condition of claiming benefit – with the Treasury indicating the measure could affect 100,000 people. “If you are not prepared to learn English, your benefits will be cut,” he said.

The total package will save £425m, Osborne said, sidestepping the Liberal Democrat insistence that welfare benefits are cut no further.

Osborne also disclosed he would save £540m by 2017-18 by introducing a less generous formula to subsidise the rent levels of social landlords, including housing associations.

Ed Balls accused the chancellor of inflicting “more cuts to the police, more cuts to our local services”. He added: “This out of touch chancellor has failed and families and business are paying the price for this failure.”

Pointing out that Osborne had forecast the economy would grow by 6%, he said the chancellor had promised “we are all in this together” but then lowered taxes for millionaires. Balls told MPs: “His friends call him George, the president [Obama] calls him Jeffrey, but everyone else calls him Bungle!”

Welfare spending will also be subject to an overall five-year rolling cap to be set annually at the budget from 2015 and covering £100bn of the main benefits, except the basic state pension.

Osborne said he would set the precise level of the cap before April 2015, and the Office for Budget Responsibility would be given legal powers to inform the government if it were liable to breach its cap.

But critics said the cap was a gimmick.

Ian Mulhearn, director of the Social Market Foundation, said: “Welfare cuts already in place mean that in the years ahead spending on working-age benefits will be flat. The real driver of growth in welfare spending over the next five years – pensions – are excluded from the cap, and the government has successfully cut around £20bn from working-age welfare with no cap at all.”

Today the Treasury chief secretary, Danny Alexander, will set out plans to spend £300bn in capital spending, excluding depreciation, between now and 2020, including £50bn extra spending in 2015-16 on affordable housing, roads and rail. But there will be no actual increase in capital spending in comparison with 2014’s £50bn budget, merely an earmarking of how the government will spend capital.

In a sign that capital spending can bring other problems, it emerged in a separate Commons debate that the cost of the controversial north-south, HS2 high-speed railway network had soared by £10bn, or 30%, to £42.6bn.

The biggest loser in 2015-16 in financial terms from the previous year is local government, which is taking a £2.6bn cut. Vince Cable’s business department will be required to make £800m of resource savings, the Ministry of Justice £700m, the Home Office £600m, Defence and Education both £500m. However, Osborne promised the cuts to defence would not affect manpower or equipment. In percentage terms, local government, culture, cabinet office, transport, justice, work and pensions, the treasury and department of the environment all suffered percentage cuts of over 7% in 2015-15. Overall local government spending has already been cut by 27%, with at least another two years of even more severe cuts to come in Britain’s town halls in the years to 2017-18.

Cable, the last cabinet minister to settle, insisted on a combined capital and current spending package and believes he has protected the central mission of the business department, with the science budget protected in cash terms.

Osborne also set out a series of long-term radical reforms to the public sector in an attempt to show he was not just salami slicing in the face of lower than expected growth and rising borrowing. He included an end to automatic pay rises for public sector workers, claiming pay has been rising in public sector by 7% despite pay freezes. Civil service unions dispute the figures.

The chancellor also promised a new national funding formula for schools in an effort to iron out the big differences in financial support between regions – which in some cases amount to thousands of pounds per pupil – but which experts warn will inevitably create winners and losers as resources get shifted.

Other measures include a £3bn integration of the combined £100bn health and social care budget so services are commissioned jointly by local NHS and local councils.