Spending review 2010: George Osborne announces extra £7bn of welfare cuts
Chancellor unveils biggest UK spending cuts in decades, telling MPs ‘today is the day that Britain steps back from the brink’
George Osborne today announced an extra £7bn of welfare cuts, allowing him to turn the tables on Labour by claiming reductions in Whitehall departments would be lower than those planned by the previous government.
Osborne told MPs that “today is the day that Britain steps back from the brink”, as he outlined the long-awaited comprehensive spending review, which he said would achieve a balanced budget and falling national debt by 2014-15 while putting public services and the welfare system “on a sustainable, long-term footing”.
The chancellor outlined a series of complex new welfare reforms to make the extra savings, as he claimed that the coalition was confronting a “decade of debt”.
To gasps from the Labour benches, the chancellor announced “tough but fair” reforms that will lead to extra changes for housing benefit and on the rules for the mobility and care arrangements for disability living allowance.
Alan Johnson, the shadow chancellor, attacked “the deepest cuts to public spending in living memory”, which he warned could end up “stifling” the economic recovery.
Osborne also announced that there would be an annual £2.5bn saving from withdrawing child benefit from higher rate taxpayers – more than the £1bn identified when the chancellor announced the change at the Tory conference earlier this month.
The extra raid on welfare gave the chancellor a highly political flourish at the end of his spending announcement. Osborne said that extra cuts to welfare meant that departmental budgets would be cut by 19% over the next four years.
This is one percentage point lower than the 20% cut implied in Labour’s plans to halve the fiscal deficit over four years.
To loud cheers from Tory MPs, who rose to wave their order papers, the chancellor said: “The average savings in departmental budgets will be lower than the previous government implied in its March budget.
“Instead of cuts of 20% there will be cuts of 19% over four years. So I thank them for their input and look forward to their support.”
The announcement by the chancellor, reminiscent of the political flourishes by Gordon Brown when he attempted to embarrass the Tories, was designed to undermine Labour’s central charge: that the coalition’s plans to eliminate the structural deficit by 2015 are irresponsibly fast and will jeopardise the fragile recovery.
In a highly political speech lasting just over an hour, the chancellor said the £83bn public spending cuts over the next four years in the government’s most severe financial retrenchment in decades were based on reform, fairness and growth.
He announced that the schools budget would rise in real terms and the introduction of the £2.5bn pupil premium to target resources at disadvantaged pupils.
The NHS budget will, as expected, rise above the rate of inflation from £104bn this year to £114bn by the end of the four-year spending period, and universal benefits for pensioners including free eye tests, prescription charges, bus passes, TV licences for the over-75s and winter fuel payments will be maintained.
But there will be cuts. Police budgets will be cut by 16% over four years, councils will face cuts of 7.1% a year, and the Home Office and the Ministry of Justice will see their budgets cut by 6% a year.
Osborne also announced that the state pension age for both men and women would rise to 66 by 2020. This is four years earlier than planned for women, prompting critics to accuse the chancellor of making them unfairly shoulder the bulk of the £5bn-a-year savings the move will achieve.
Osborne said the money would be used “to provide a more generous basic state pension as we manage demographic pressures”.
The chancellor blamed the previous government for leaving the coalition with the “worst economic inheritance in modern history”, which he said had brought Britain a level of debt that “threatened every job and public service in the country”.
“But we have put the national interest first,” he said, “made the tough choices … and we will make sure that the financial catastrophe that happened under the previous government never ever happens again.”
Osborne confirmed that the government anticipates almost half a million job losses in the public sector by 2015 as a result of the measures to tighten the reins on public spending.
In a move set to provoke a standoff with public sector unions, he said the government would also consult on increasing public sector workers’ contributions to their pensions, with the aim of saving £1.8bn per year in the cost of public service pensions by 2014-15.
He defended the decision to axe child benefit for high earners and scotched speculation that it would be scrapped for all children over 16.
He announced changes to the social housing system: for existing social tenants, rent levels will remain unchanged, but new tenants will be offered intermediate rents at around 80% of the market rent. The age at which people are allowed to claim housing benefit for a flat, rather than only a room in a shared house, will rise from 25 to 35, “so that housing benefit rules reflect the housing expectations of people of a similar age not on benefits”, said Osborne.
A £4.4bn package of capital funding will enable the government to build up to 150,000 new affordable homes over the next four years.
Other announcements include the protection of the science budget and transport projects. Osborne insisted that those with the “broadest shoulders should bear the greatest burden” and said the Queen had agreed to lead the nation in stepping “back from the brink” after agreeing to spending cuts that will help confront a “decade of debt”.
The royal household’s spending will fall by 14% in 2012-13 while grants to the household will be frozen in cash terms.
Despite his promise to protect public services, Osborne’s decision to make town halls find 7.1% of savings for each of the next four years is expected to hit those most in need of local provision.
Councils will be given greater flexibility to manage council tax together with direct control over council tax benefit, within an overall budget that will be reduced by 10% from April 2013, he said.
In recognition of pressures on social services, grant funding for social care will be increased by an additional £1bn by the fourth year of the spending review, and a further £1bn for social care to be provided through the NHS to support joint working with councils “so that elderly people do not continue to fall through the crack between two systems”.
He also announced an increase in the child element of tax credits over the next two years.
An increase in the child element of the child tax credit by a further £30 in 2011-12 and £50 in 2012-13 above inflation will ensure low income families with children would be protected from the “adverse effect from these essential savings”, he said.
Osborne told MPs that Britain had the largest structural budget deficit in Europe at £109bn, he said, with £43bn in debt interest paid back each year.
Capital spending will be £51bn next year, then £49bn, then £46bn and £47bn in 2014-15 – about £2bn a year higher than set out in the budget.
Total public expenditure, which includes debt interest payments, will be £702bn next year, then £713bn, £724bn and £740bn, bringing real terms public spending to the same level as 2008.
Debt interest payments will be lower by £1bn in 2012, £1.8bn in 2013 and £3bn in 2014, a total of £5bn lower over the course of the spending review period.
Osborne told MPs that a “strong Britain starts here”. He said: “This coalition government faced the worst economic inheritance in modern history.
“The debts we were left threatened every job and public service in the country. But we have put the national interest first, made the tough choices, protected health and schools and investment in growth.
“We have reformed welfare and cut waste and made sure that we are all in this together. And taken our country back from the brink of bankruptcy.”
In response to Osborne, Alan Johnson acknowledged the “deficit has to be paid down” but said the announcements would affect “people’s futures, people’s jobs, people’s pensions, people’s services, their prospects for the future”.
For some on the government benches the cuts were an “ideological objective,” he claimed. “Today’s reckless gamble with people’s livelihoods runs the risk of stifling the fragile recovery.”
He accused the government of being “deficit deceivers” who “peddled a whole series of myths to the British public” about the nation’s finances.
“The most incredible myth of all is that the global economic crisis since the Great Depression is the fault of the previous government,” he said.
Johnson said that when the crisis hit Britain’s debt was the second lowest of any G7 country, that debt interest levels were 15% lower than when Labour came to office and the interest rates on UK debt had been falling since the beginning of the year.
At the time of the last CSR in 2007 Osborne had argued “we were spending too little”, Johnson said
Osborne’s statement followed a heated exchange at prime minister’s questions between David Cameron and Ed Miliband over the coalition government’s austerity drive.
Miliband accused Cameron of taking “the biggest gamble in a generation” with growth, jobs and livelihoods.
Cameron conceded that the outlook for the world economy was “choppy and difficult” but accused the Labour leader of being “thoroughly irresponsible”.