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Next government 'must make cuts'

Billions of pounds will have to be cut from welfare spending in the next parliament whoever wins the general election, George Osborne has said.

The Chancellor said an Office for Budget Responsibility (OBR) forecast that Government spending on goods and services was expected to reach its lowest level as a proportion of domestic product since records began in 1948 did not take into account further cuts to benefits.

In order to spare further swingeing cuts to Whitehall budgets, and to protect investment in schools and science, there would have to be a focus on reducing the amount spent on welfare.

Responding to the OBR's projection of 1948-levels of spending, Mr Osborne told MPs: "I think that assumption is based on what I think is an erroneous judgment ... about what the political system will do.

"They are perfectly right that on the current plans that's what it shows. But I think the next government will want to undertake further reductions in the welfare budget and further welfare savings.

"If you undertake further welfare savings then you don't reach that 1948 number."

He added: "I think as an important part of the consolidation that remains to take place we need further welfare savings. I don't think all the savings need and should be made within the departments.

"I think we should make a balanced judgment about where government spends its money and, yes, we have got to make difficult decisions to save money further in Whitehall but we should accompany that with savings in the welfare budget."

During an appearance before the Treasury Select Committee Mr Osborne was challenged about Institute for Fiscal Studies (IFS) projections that either further Whitehall budget cuts or £12 billion in annual welfare savings would be needed to reach his goal of eliminating the deficit.

The IFS warned that Mr Osborne's plans to return the budget to surplus by 2018/19 implied further hefty cuts to public services over the next five years.

By the end of 2013/14, Whitehall departmental spending will have fallen by just over 8% and without further tax rises or welfare cuts that looks set to rise to 20% by 2018/19.

The IFS said that would mean a pick-up in the rate of cuts to public services to 3.7% a year and that just to avoid such an acceleration would require a further £12 billion a year in welfare cuts.

Mr Osborne said the projection of 3.7% Whitehall cuts " assumes there are no welfare savings", adding: "I don't accept that. That's going to be a decision for political parties and the government after the election.

"My view is welfare expenditure cannot be excluded from difficult decisions that need to be made. If you want to maintain the same pace of reduction in government spending that we have had over this parliament, rather than accelerating it, then you are going to have to find billions of pounds of welfare savings.

"I think that is what this country needs to do. Personally I think if it comes to a choice we should be making our investment in schools and in science, because that's securing the long-term economic health of this country and we shouldn't be cutting those things because we are not prepared to deal with the welfare budget."

Asked about the IFS' figure of £12 billion in welfare cuts, Mr Osborne said: "That's what the IFS have pointed out. I'm not going to put a precise figure on it today, not least because these numbers change around."

But he added: "I think you are going to have to find billions of pounds more in welfare savings if you want to a) make sure we reduce the deficit, eliminate the deficit and get our debt falling and b) have a state that is investing in the things like education and science, and indeed healthcare, that really matter to our country's future."

Mr Osborne rejected claims that his controversial Help to Buy scheme is fuelling a house-price bubble in London and the South East, insisting that the majority of applicants have been buying relatively modestly valued homes in other parts of the country.

The Chancellor's decision to set a maximum value of £600,000 for homes eligible for a 15% Government-backed mortgage guarantee under Help to Buy led to claims that the policy would fuel further rises in the already-resurgent housing market in the capital, rather than its intended goal of helping first-time buyers unable to scrape together the large deposits currently demanded by banks.

The chairman of the Treasury Select Committee Andrew Tyrie challenged the Chancellor over allegations that the policy was "adding vodka to the punch bowl just as the party gets going".

But Mr Osborne insisted that Help to Buy support was going to the right kinds of households.

"The early evidence from Help to Buy is that three quarters of those taken out are not living in London and the South East," said the Chancellor. "The average house purchase that they have been looking for is £160,000 - that's below the national average.

"In other words, it is dealing with exactly the families we want it to help."

The exchange came as Mr Osborne was grilled by the committee over the details of his Autumn Statement last week.

He announced that n ext year's Budget will be held on March 19.

But he resisted requests from committee member John Mann to estimate the cost of filling the tank of a Vauxhall Astra car with petrol, leading the Labour MP to taunt him: "I know that your colleagues suggest you are yearning for Chinese-style government, but you are here to answer questions."

Mr Osborne retorted that, as Chancellor, he has no control over the global oil price, but that his successive decisions to freeze fuel duty meant that a litre of petrol was now 20p cheaper than it would have been under the plans he inherited from the previous Labour government.

Challenged again on the IFS calculation that £12 billion of welfare savings would be needed to protect services from further cuts, Mr Osborne told the committee: "I don't want to put a number on it, but I agree with the analysis behind that number, that many billions of pounds of welfare savings are going to be required if we want to avoid cutting Government budgets any further than they have been.

"Anyone who wants to be honest with the British public about dealing with the deficit and making sure we retain public services of sufficient quality should also be honest about the welfare savings that are required."

Asked whether he agreed with the OBR analysis that it was "inconceivable" that household incomes had not been falling since the financial crisis of 2008, Mr Osborne said: "I agree that what happened in 2008 has made this country a lot poorer. I accept that.

"What I would say is that the way to make the country richer is to stick with the economic plan that has helped us recover from that economic calamity."

The Chancellor added: "It is inconceivable that you can lose 7% of your GDP and that doesn't have an impact on the living standards of the people of this country.

"But the best answer to that is to work through the problems, deal with the public finances, get the economy to a position where it can grow in a sustainable way."

Mr Osborne defended his claim that the tax allowance for married couples announced in last week's Statement would benefit some of the poorest families. The measure permits married couples and civil partners where both spouses earn less than the upper-rate threshold for income tax - around £42,000 - to transfer up to £1,000 worth of unused personal allowance, potentially saving them around £200 a year.

The Chancellor said: "Some of the poorest families are those with single earners, and now they will be able to transfer their unused personal tax allowance."

He rejected the suggestion that families in receipt of welfare would lose a pound in benefits for every pound they gained from transferring allowances, telling the committee: "There is not a 100% taper on Universal Credit."

Mr Osborne defended the Government's handling of the flagship Universal Credit programme to streamline a number of out-of-work benefits into one single payment.

Work and Pensions Secretary Iain Duncan Smith has come under fire after it emerged that he has had to write off millions of pounds spent on IT for the project and will miss his deadline of getting all claimants on to the new credit by 2017.

But Mr Osborne said: "I would much rather get this right than rush it. Taking time to get Universal Credit right is the right approach.

"The thing that would worry me is if we were rushing this system.

"I want to ensure good value for money and the best way to get good value for money is to take this step by step and make sure of getting it right.

"If there is a problem with the software, I would much rather discover the problem with the software right at the beginning before we have moved 7 million people on to the software."

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