Welfare budget faces further £7bn in cuts

The Chancellor announced more welfare reforms, including a fresh crackdown on benefit fraud, aimed at making £7 billion worth of cuts on top of previously announced savings of £11 billion.

The current "complex" system of means-tested working age benefits and tax credits will gradually be replaced by a Universal Credit that will "sharpen" work incentives and reduce fraud and error, Mr Osborne said.

But he pledged that low income families with children would be protected from the adverse effects of the "essential savings".

One way this would be achieved was through an increase in the child element of the Child Tax Credit by a further £30 in 2011-12 and £50 in 2012-13 above inflation, he said

He defended the decision to axe child benefit for high earners and scotched speculation that it would be scrapped for all children over 16.

The package of welfare reforms includes freezing the working tax credit for three years from next April, changing working tax credit eligibility and ending payment of the mobility component of the Disability Living Allowance.

The Government announced welfare savings of £11 billion in June's emergency budget, so the total is now £18 billion a year by 2014/15.

A White Paper will soon be published by the Work and Pensions Department which will give details of £2 billion being set aside to fund the new Universal Credit.

A new work programme is also being launched, offering personalised support for jobseekers with the greatest barriers to employment.

Private and 'third sector' providers will be paid on the basis of additional benefit savings they make.

The DWP's administration budget will also be reduced by 35% and its core budget reduced by 26% in real terms by 2014/15 by cutting corporate overheads, reducing the costs of benefit processing and replacing "wasteful and ineffective" welfare to work programmes.

The department said it will stop issuing National Insurance cards to customers and send letters instead, saving the taxpayer £1 million a year, stop issuing a remittance advice with every weekly payment of a back to work credit or training premium, saving up to £3 million a year, and change how Jobcentre Plus measures performance, cancelling at least two target management contracts, with an annual saving of at least £1.2 million.

Work and Pensions Secretary Iain Duncan Smith said: "This settlement allows the department to undertake the vital reform of the welfare system that the country needs.

"A welfare system that does not trap people into an endless cycle of benefits but instead helps them into work that pays, alongside a pension system that is fair and sustainable for the long term."

The Government announced further plans to cut housing benefit payments, by increasing the age threshold for the so-called shared room rate in housing benefit from 25 to 35.

From 2012, single people under 35 will be paid a shared room rate rather than a rate for a full flat.

The shared room rate is lower than all other housing benefit payments and is currently paid to claimants under 25. It is based on the amount of rent charged for a single room with shared use of the rest of a house.

The government said it expects that raising the age at which the shared room rate can be paid will save £215 million by 2014/15.

The Chancellor said: "This will ensure that housing benefit rules reflect the housing expectations of people of a similar age not on benefits."

Campbell Robb, chief executive of Shelter, said: "The combined worry of cuts to housing benefit and the slashing of the affordable house building subsidy, coupled with the absence of a long-term strategy, will be devastating for the housing aspirations of thousands of young people consigned to increasing costs and bringing up their families in an insecure private rented sector."

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