Further swingeing cuts facing schools, hospitals and benefits

Spending on welfare payments, schools and hospitals will have to be slashed by billions of pounds more than the Government has planned for as a result of economic downturn, Treasury estimates revealed yesterday.

The cuts – more than £10bn a year by 2016 – are likely to result in further swingeing reductions to benefits and public sector services well beyond the next election.

A cut of £10bn in the welfare budget roughly equates to an average of £500 a year for each of the 18 million people on benefits – a £10-a-week prospective drop in income for the poorest families. The current spending round has already has seen £18bn in welfare cuts.

On top of this, further departmental spending cuts are expected to be necessary – at a rate similar to the current reductions.

Hinting at the continuing austerity ahead, George Osborne said at current rates the welfare budget was set to rise and consume a third of all public sector spending.

"If nothing is done to curb welfare bills further, then the full weight of the spending restraint will fall on departmental budgets," he said.

He added that even if the rate of cuts imposed on departmental budgets were to continue beyond the current spending review period they would need to find further savings in welfare payments of £10 bn by 2016.

"The next spending review will have to confront this," the Chancellor said.

The cuts are necessary to meet the Government's so-called "fiscal mandate". This states it will eliminate the structural deficit (the amount the Government borrows every year to make up for a shortfall in revenue) and ensure that debt as a share of GDP is falling.

Mr Osborne had hoped to achieve this with the spending cuts announced in his 2010 review, but the deteriorating economic situation since then puts both Coalition parties in the difficult situation of having to go into the next election promising more on top of those already announced.

Last night Government sources suggested a new spending review could come as soon as next year.

The review will be particularly difficult for the Liberal Democrats. Last year Danny Alexander incurred the wrath of some senior party members when he confirmed the party would sign up to deficit reduction targets going beyond the next election.

Liberal Democrat sources suggested that the party was likely to sign up to a new comprehensive spending review, but would revise its position in its election manifesto.