Chancellor George Osborne keeps an eye on the election as he decides not to cap state pensions

Chancellor announces sweeping cuts to benefits bill

George Osborne tried to wrongfoot Labour as he announced that the basic state pension would not be included in a new cap on more than half the £220bn-a-year welfare budget.

In a government-wide spending review that was more about politics than economics, the Chancellor announced that housing benefit, tax credits, disability benefits and other pensioner benefits, totalling £112bn a year, would be covered by a new ceiling from April 2015. But the basic state pension, which would be included in a similar cap planned by Labour, would not be affected by the Conservatives' plans. Under them, the independent Office for Budget Responsibility would issue a public warning if the Government were likely to exceed the welfare cap, forcing the Chancellor to make cuts or explain himself to Parliament.

With an eye on the 2015 general election, Mr Osborne challenged Labour, which he dubbed "the welfare party," to say whether it would reduce pensions. He said Labour's proposed cap "would mean that a future government could offset a rise in working-age benefits by cutting the pensions of older people."

Ed Balls, the shadow Chancellor, side-stepped the trap, insisting that Labour was committed to the "triple lock" under which the state pension rises annually by earnings, inflation or 2.5 per cent, whichever is highest. Instead, Labour might raise the age at which people qualify for the state pension.

Mr Osborne opened the door to curbs on pensioners' perks by announcing that the winter fuel allowance will be withdrawn in autumn 2015 from 100,000 pensioners living in France, Portugal, Spain, Greece, Gibraltar, Malta and Cyprus, where the temperature is warmer than the South West of England. It will save £30m a year.

Unveiling £11.5bn of cuts for 2015-16, the Chancellor admitted that balancing the nation's books meant "difficult decisions," saying: "There never was an easy way to bring spending under control."

Today (thurs) the Government will announce how it will spend £100bn on road, rail, energy and housing projects. The infrastructure plans will include more affordable housing for low income groups, funded partly by lower than expected rents for council and housing association tenants, which will save £540m in housing benefit by 2017-18.

Mr Osborne said £5bn of the £11.5bn cuts would be achieved by efficiency savings. Some 144,000 public sector jobs will be lost in 2015-16 and automatic annual pay rises ended in the NHS, schools, the police and prisons-- but not the armed forces.

The Chancellor found some good news to announce, extending the freeze in most council tax bills for another two years. But local authorities were among yesterday's biggest losers, seeing their government grants cut by a further 10 per cent. Spending on health, schools and overseas aid was again protected. Parts of health and social care budgets will be merged, with more than £3bn spent on services for older people jointly commissioned by NHS and local authorities by 2015-16.

Analysts warned that deeper cuts and some tax rises would be needed after the May 2015 election, no matter who is in power. Paul Johnson, director of the Institute for Fiscal Studies, said that on current plans, by 2017-18, government spending would be a third less than in 2010. "If I was a betting man, I would think there would be some kind of tax rises after the election," he said.

During angry Commons clashes, Ed Balls, the shadow Chancellor, told Mr Osborne his statement meant more cuts to the police, defence budgets and local services."You have failed on living standards, growth and the deficit. And families and businesses are paying the price for your failure," he said. "You said we were all in this together but then you gave a huge tax cut to millionaires. You promised to balance the books but that promise is in tatters," he said.

He challenged Mr Osborne to take "bold action" now to protect public services rather than promise infrastructure spending in five or seven years' time. "Instead of action to boost growth and long-term investment all we got today is more of the same from a failing Chancellor," he said.

Liberal Democrat ministers insisted they had fought their corner on issues such as the Business Vince Cable's pro-growth measures and secured the boost to capital spending.

But Prateek Buch, director of the Social Liberal Forum, said: "Britain needs a more effective economic approach beyond hoping that cutting government spending will heal the economy….The additional cuts to local government, transport and public sector pay will squeeze already-strained public services, making a mockery of the localism agenda and adding more pressure on the cost of living. Such decisions are the painful consequence of prioritising a balanced budget over a balanced economy and society."