Era of austerity to see savage cuts in Whitehall – and beyond

Public sector cuts: Osborne's target of 25 per cent savings across all government departments is the most ambitious since the Thatcher years

Public sector workers face cuts in their pay and job prospects worse than anything they have seen for a generation as George Osborne tries to cut spending in the way that Margaret Thatcher did – but in half the time.

For years, Thatcherite Tories dreamed of getting total spending by the government down below 40 per cent of the nation's total wealth as measured by gross domestic product, but it took Mrs Thatcher until 1988, eight years after she came to office, to achieve it. With public spending now at a level not seen for 25 years, George Osborne's target is to be back below that 40 per cent figure in just four years.

That will mean brutal cuts in the budgets of some departments. Mr Osborne is calling for an overall reduction of 25 per cent, but since the education and defence budgets will get off relatively lightly, other budgets may have to come down by more than a quarter.

And that assumes that he actually achieves the huge cut in the bill for welfare set out yesterday. Mr Osborne is looking to cut spending by £32bn in four years, with £11bn coming off state benefits, the rest from departmental budgets. The only departments spared the axe are to be the NHS and overseas aid.

How the cuts are to be achieved will occupy the minds of ministers between now and the Comprehensive Spending Review on 20 October. One detail that emerged yesterday is that the Ministry of Justice is expected to announce that dozens of magistrates' courts are to be closed.

"If anyone working in the public sector hadn't got the message so far, it will have hit home today," Alan Downey of the City firm KPMG warned. "The scale of the crisis facing the public sector is unprecedented and the cuts announced are even deeper and more painful than expected. The number of public sector jobs will inevitably fall dramatically."

Dave Prentis, general secretary of the public sector union Unison, said: "This Budget signals that the battle for Britain's public services has begun with the Government declaring war. Public sector workers will be shocked and angry that they are the innocent victims of job cuts and pay freezes."

The only way that departmental budgets could be saved is if the welfare budget can be cut by even more than the £11bn target set by Mr Osborne, but that figure already means there is grim news on the way for lone parents, and for families relying on tax credits or housing benefit. And people who in the past would have qualified for disability allowance may find that they do not pass the tougher tests which are to be brought in from 2013.

From next year, single mothers will cease to be entitled to income support as soon as their youngest child reaches the age of five, but will go on to jobseeker's allowance and be expected to find work. Mr Osborne rejected calls to end payments of child benefit to the well-off, but announced instead that every mother will have her child benefit payments frozen for three years.

Mr Osborne has also announced that he wants to cut housing benefit, which now costs the state £21bn a year, compared with £14bn 10 years ago, by setting a limit to how much a family can receive. Some families get as much as £104,000 a year in housing benefit, he said.

In future, no family will be entitled to more than £400 a week. Those living in single bedroom flats will face a limit of £280 a week. Some families living in homes that are bigger than their numbers justify will be told that they cannot claim the full cost from housing benefit. That way, Mr Osborne hopes to bring the bill for housing benefit down by £1.8bn.

The charity Family Action says it will be impossible for families living in cities like London to keep within these figures. "The rates announced will turn whole areas of London into no-go areas for low income groups," said Family Action's Rhian Beynon. "You wouldn't even be able to rent in a traditional low-income residential area like Hackney."

The pressure group Gingerbread said that the combination of freezing child benefit for three years, cutting housing benefit and tightening up the tax credit system will mean a family having a second child could be £1,200 worse off this year.