Instead of increasing benefits in line with consumer price inflation of 2.2%, as had been expected for 2013-14, the chancellor said he would keep welfare increases at 1% next year and for two years after that, saving the public purse £3.7bn a year by 2015-16.
The move will be contained in a new welfare uprating bill, which breaks the link between social security payments and living standards and will see nearly all benefits subject to the new cap.
Osborne said the policy was about "being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep, living a life on benefits … we have to have a welfare system that is fair to the working people who pay for it".
But anti-poverty campaigners condemned it as creating a "decade of destitution", that will affect both the working and workless poor. Jobless benefits as well as statutory maternity pay will be limited to 1% rises, as will tax credits paid to those in low-paid work. The only exemptions are for disabled people and for carers.
The new bill will trigger a vote in parliament on the populist measures, forcing Labour to declare their position on the issue. Legislation is required as the law currently states benefits have to be uprated in line with prices, currently pegged to the Consumer Price Index.
Through the measures, the public purse will save £1.43bn a year by 2014-15 – almost enough to cover the loss of revenue from the cancelling the fuel duty rises, also announced on Wednesday.
The Treasury documents published immediately after the chancellor's statement also revealed that the government is planning a "payment-by-results pilot on outsourcing the collection of tax credits debt" – which campaigners fear could see already loosely-regulated bailiffs paid for every debt they recover.
The chancellor also announced an effective cut to universal credit, which will replace six of the seven main means-tested benefits and tax credits for those of working age, almost a year before it begins. It too will be limited to 1% rises – saving the Treasury £170m in 2014-15 and according the government's calculations £1.2bn by 2017-18. Barnardo's chief executive Anne Marie Carrie said that, next year, a workless lone parent with two children would lose £120 next year while those low-paid working couples would be £20 worse off.
"Yet again it is children from impoverished families who are unfairly suffering most under the government's austerity measures. By effectively breaking the link between benefits and inflation today, the chancellor has ensured a bleaker and bleaker future for Britain's poorest families," said Carrie.
She said low income families in the UK live on just £12 per person per day and the losses would mean difficult choices. "We know these households already have to choose between heating the house and buying school uniform. Any plans to bite further into their budgets risk tipping them into overwhelming poverty."
The Children's Society calculated that, for jobless families with two children, the changes would mean a loss of £430 a year by 2015. At the despatch box the chancellor countered claims he was targeting those at the bottom of society – noting that, over the past five years, those on out of work benefits have seen their incomes rise by 20% – twice as fast as those in work.
The charity also took issue with the chancellor's attempt to pit "workers" against "shirkers" pointing out that the rise of in-work poverty and spread of low-wage employment had meant that of the 11m people living in poverty, more than half had jobs.
Matthew Reed of the Children's Society said: "Although the chancellor chose to present benefit claimants as sleeping at home while others go out to work, the truth is that the majority of families on benefits are working families … Reducing the rate at which benefits are increased to take account of rising prices will make it harder for already struggling families to make ends meet".
The chancellor also announced that the historic link between the cost of renting and housing benefit payments would be broken. With charities already warning that "deepening benefit cuts" will have a "dramatic impact on homelessness", Osborne said local housing allowance, the benefit paid to landlords for poor people's homes, would be increased by 2.2% next April but "then we will cap increases at 1% in the two years after that".
The saving to the taxpayer is £105m in 2014, rising to £260m a year in 2018. But the move will mean that the gap between rents – which have been rising at a faster rate than inflation – and the cash benefits to the poor will grow. The move is a confusing one as last year's welfare reforms – which were supposed to take effect next April – linked housing allowance rises to CPI inflation.
Kate Webb at Shelter warned that "linking CPI to local housing allowance would make a third of local authorities unaffordable to low income households by 2023 ... today's announcement imposes a further change to uprating, making it more likely that rents will outpace LHA by the time of the next election. Surely the Treasury should monitor the impact of its first cut before imposing a second?".
Stung by criticism that, in central London, councils are homing people outside of the capital because cuts have made local housing unaffordable, the government attempted to soften the blow by saying that "30% of the savings will be used to exempt from the new cap those areas with the highest rent increases".
That will mean high-cost areas in London are spared some of deepest cuts to housing benefits, but it is unlikely to stop the poor being forced to leave – merely delaying their departure.
The chancellor can point to the weakening economy as a reason for a hardline approach to welfare. The Office for Budget Responsibility's report shows that its forecast for the housing benefit bill has risen by more than £2.8bn over the next five years – in just six months.
The OBR's Economic and Fiscal Outlook says that higher caseloads mean that housing benefit will cost £600m more in 2012-13 than it forecast at the time of the budget in March, £700m more in 2013-14, £600m more in 2014-15, £500m more in 2015-16 and £400m more in 2016-17.
With housing moving up the political agenda, ministers seem certain to press ahead with the "Bob Crow" council house tax – named after the trade union leader who earns £145,000 and lives in social housing.
The autumn statement says that the coalition will "ensure the best use of social housing assets and that those who can afford to make a greater contribution do so" – with an announcement by next year's budget.
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