Age of austerity to last another six years, downbeat Osborne warns

The Coalition Government will agree an extra £10bn of spending cuts by next June as George Osborne admitted the "age of austerity" would last for at least another six years in a downbeat mini-budget yesterday.

All sections of society were squeezed as the Chancellor admitted he would miss his target to reduce debt as a share of national income by 2015-16. Most working age benefits will rise by only 1 per cent over the next three years. The rich will see the maximum amount they can put into a pension while attracting tax relief reduced from £50,000 to £40,000.

The Chancellor had little scope to pull a rabbit out of his hat. And there was a sting in the tail for those on middle incomes as Mr Osborne's aides admitted that another 400,000 people will be dragged into the 40p higher income tax bracket by 2015, taking the figure to 4.2 million. The small print of yesterday's Autumn Statement showed that this group – a key Conservative target at the next election – will be £117 a year worse off by then.

Mr Osborne admitted that cutting the deficit was taking longer than expected but insisted "Britain is on the right track". But he pencilled in a further £4.3bn of spending cuts for 2017-18, an extra year of austerity now needed to clear the deficit, opening himself up to fresh charges of "pain without gain".

The credit rating agency Fitch warned yesterday that the failure of the Chancellor to hit his debt target could lead to Britain being stripped of its AAA credit rating: "Missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the rating."

Tory and Liberal Democrat MPs welcomed two pieces of good news in an otherwise austere package. The 3p-a-litre rise in petrol duty due next month was scrapped and the amount people can earn before paying income tax, due to rise to £9,205 in April, will now increase by an extra £235 to £9,440. Mr Osborne said the Government was in "touching distance" of a £10,000 threshold, the Liberal Democrats' flagship policy.

The Liberal Democrats signed up to a further £10bn cuts for 2015-16 in a move that will worry some party activists. They insisted it would have been "irresponsible" not to do so because that financial year will start five weeks before the election in May 2015, saying further savings were needed to achieve the Coalition's core mission to cut the deficit.

A government-wide spending review will be completed in the first half of next year, with the Home Office, the Ministry of Defence, the Ministry of Justice and local government among those likely to come under pressure. The Liberal Democrats will not allow any more welfare cuts on top of the £3.7bn benefits squeeze announced yesterday.

A trade-off between "wealth and welfare" by the two Coalition parties was at the heart of yesterday's statement. In the private talks, the Chancellor was more open to the Liberal Democrat plans for a mansion tax or higher council tax bands for expensive properties than his public rejection of a new "homes tax" suggested yesterday. But the move was vetoed by David Cameron, who feared a backlash from Tory supporters. In turn, the Liberal Democrats blocked Mr Osborne's push for a total freeze in most working-age benefits, insisting on a 1 per cent rise. They also stopped his proposal to end housing benefit for most under 25-year-olds and to limit benefits for children to the first two for new claimants .

But Mr Clegg failed to prise more money out of the Treasury to relieve the burden of childcare costs.

Mr Osborne had to swallow scaled down forecasts on growth from the Office for Budget Responsibility (OBR), which predicted that the economy will shrink by 0.1 per cent this year. Although he said the deficit had been cut by a quarter, critics seized on the OBR figures, suggesting that the nation's "black hole" was barely smaller than when the Coalition took office.