Nick Clegg struggles to contain his party's 'guilt by association' with Coalition cuts

Half a million public-sector jobs will be lost as a result of the draconian cuts to be unveiled today by George Osborne, the Chancellor, in Britain's biggest spending squeeze since the 1920s.

Other public employees will be asked to work shorter hours – and take pay cuts – to save themselves from the sack. Analysts expect another 500,000 jobs to be lost in private companies that rely on public-sector contracts or grants.

The toll of job losses, and further reductions in the welfare budget to be announced today, threaten to undermine the Coalition Government's drive to sell the £83bn cuts package as "tough but fair". The welfare budget now faces a £25bn squeeze, £13bn more than previously disclosed. Incapacity benefit for the sick and disabled could be means-tested, with people judged capable of returning to some work losing out if they have savings of more than £16,000.

Nick Clegg, the Deputy Prime Mini-ster, yesterday tried to calm jitters among Liberal Democrat MPs about the impact of the cuts – not least on the party's own electoral fortunes. He said: "The spending review provides the best evidence yet of why we are in government – and that we are delivering on our priorities."

The threat of job losses among the 5.5 million public-sector workers comes on top of a two-year pay freeze from next April for those earning £21,000 or more a year, and curbs on their pensions.

Some 42,000 jobs will be lost at the Ministry of Defence under a separate review unveiled by David Cameron yesterday. The Ministry of Justice is set to axe 14,000 posts, according to an internal memo leaked to Channel 4 News last night, including 11,000 frontline staff, such as prison and probation officers and magistrates' court officials.

The impact on employment emerged when Danny Alexander, the Treasury Chief Secretary, was photographed in his car with a briefing document summarising today's spending review. It forecast 490,000 job losses by 2014-15, and said the Government would support "voluntary deals with staff on pay restraint or reduced hours in order to save jobs". Downing Street said this "process" would be spelt out today.

Mr Clegg, who beat off a Treasury attempt to end 15 hours of free child care for all three- and four-year-olds, trumpeted Liberal Democrat "gains" in the spending review – including a £2.5bn-a-year "pupil premium" for children from disadvantaged families; protecting spending on health, overseas aid and infrastructure projects; radical welfare reform; and delaying a decision on whether to renew the Trident nuclear missile system.

In a high-risk strategy, Mr Clegg urged his MPs to share ownership of the cuts, describing them as a "Coalition process and Coalition product".

Admitting that the review involved difficult decisions, he insisted: "These are the right decisions to build a fairer and more liberal Britain."

Vince Cable, the Liberal Democrat Business Secretary, secured a last-minute reprieve to the science budget after he warned that the Treasury's planned 10 per cent reduction would harm the Government's "growth strategy". It will now drop by about 5 per cent. His department faces an overall cut of about 25 per cent.

But the Liberal Democrats' claims were called into question when Save the Children calculated that benefit cuts already in the pipeline would leave children £23bn worse off. They include the scrapping of child benefit for families with a top-rate taxpayer. The charity said Mr Clegg's £7bn "fairness premium" would "not put a hot meal on the table or buy a winter coat for the 3.9 million children who live in poverty".

Treasury sources insisted the figures for job losses were foreshadowed by the independent Office for Budget Responsibility in June. They said some of the reductions would be achieved by not replacing staff who leave and voluntary redundancies. But Labour and trade unions seized on the disclosure.

Douglas Alexander, the shadow Work and Pensions Secretary, said: "The Tories and the Liberal Democrats still seem to think unemployment is a price worth paying. They are planning to put people out of work far faster than the private sector can create jobs for them to go to. The risk is that this will make reducing the deficit even more painful."

The Shadow Cabinet agreed yesterday to brand the Conservatives and their Liberal Democrat partners as "deficit disciples" as Labour MPs answer the Coalition's charge that they are "deficit deniers".

Brendan Barber, the TUC general secretary, said: "Public-sector staff are already facing a pay freeze at a time when inflation is over target, and may face pension increases that will mean a cut in take-home pay. The sheer scale of cuts anticipated in the review make job losses inevitable."

Mervyn King, the Governor of the Bank of England, last night said the country faced a "sober" decade ahead, meaning "a decade of savings, orderly budgets and equitable rebalanacing".

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