Spending Review: Chancellor George Osborne hints Tories would make further welfare cuts rather than increase taxes after next election

While respected fiscal think tank criticises George Osborne's decision to continue the freeze on council tax

The Conservatives would make further cuts in the welfare budget rather than increase taxes after the 2015 general election, George Osborne has suggested.

The Chancellor sketched out another dividing line with Labour after experts warned that tax rises and spending cuts would be needed to balance the nation's books in the two years after the election.

Senior Tories believe the party's manifesto will pledge several billions of pounds of benefits savings to meet the new cap on the welfare budget announced in Mr Osborne's spending review on Wednesday.  The Chancellor intends to maintain the current  split under which 80 per cent of his deficit-reduction programme is met by cuts and 20 per cent from tax rises. In contrast, Labour and the Liberal Democrats are expected to pledge to raise a higher proportion from tax increases. Both are already committed to bring in a mansion tax on homes worth more than £2m and Labour may bring back a 50p top rate of tax on earnings over £150,000 a year.

In a round of media interviews, Mr Osborne said: “I think most of the effort for dealing with this country's problems should come from cutting government spending, controlling the welfare bill.”

Although he refused to categorically rule out any post-election tax rises, he said: “This will be an issue, I suspect, eventually when people come to choose their next government because my political opponents would probably want to put taxes up, my instinct is let's try and control welfare bills, let's try and control the cost of what we're doing. Just putting more and more taxes on people is not really the right answer.”

A respected fiscal think tank criticised Mr Osborne's decision to continue the freeze on council tax. “This is not a sensible reform and it is not one that is being properly announced or debated” said Paul Johnson, director of the Institute for Fiscal Studies (IFS).

The Chancellor announced on  Wednesday that he would fund councils to freeze council tax for a further two years from next April. He said that this would knock around £100 from the average council tax bill, bringing the total saving for families over the Parliament to £600.

But Mr Johnson said these rolling freezes on council tax were undermining the UK's main tax on property with potentially serious consequences for the future stability of local government finances.

“We know that the more often you offer one-off freezes to taxes the harder it is to unfreeze them” he said. “We need an effective property tax and we need a robust source of funding for local government. This continuing policy looks set to undermine both”.

Council tax raises £27bn nationwide annually. The IFS estimates that by the end of 2015-16 these revenues will be £3bn lower than they would have been in the absence of the Coalition's freezes.

The IFS also attacked the Treasury for the paucity of detail it released in Wednesday's review, which set departmental spending limits for the first year of the next parliament. “Publishing such a small amount of information with so little explanation is not an exercise in open government” said Mr Johnson.

For example, he pointed to that fact that March's Budget documents had pointed to a £7.4bn spending limit for the Home Office in 2014-15, but the spending review said the limit would be £10.4bn. Mr Johnson said that the explanation turned out to be that the police grant has been quietly shifted out of the local government budget and into the Home Office budget.

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