Shopping basketAnnual rises in most working-age benefits are to be capped at 1% in the coming years, cutting a further £3.7 billion from the welfare bill, Chancellor George Osborne has announced.

The move means that upratings are likely to be below inflation in future years, gradually reducing the real value of benefits over time and breaking the link which has previously seen them rise in line with prices.

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Autumn Statement 2012


But the Chancellor said he would protect the vulnerable by continuing to increase carer benefits and disability benefits in line with inflation.

Mr Osborne's announcement fell short of the freeze in benefits which some pressure groups feared, but was still greeted with dismay by some anti-poverty campaigners. It comes on top of £18 billion in welfare cuts that had previously been announced.

Delivering his autumn statement to the House of Commons, Mr Osborne said that it was "fair" that welfare recipients should receive similar increases in income to those enjoyed by public sector workers, who are getting a 1% rise as a lengthy pay freeze comes to an end.

Ministers are understood to have been eyeing an end to the link with prices since it delivered a 5.2% uprating in April this year due to higher-than-expected inflation the previous autumn.

Mr Osborne told MPs: "We have to acknowledge that over the last five years those on out-of-work benefits have seen their incomes rise twice as fast as those in work. With pay restraint in businesses and government, average earnings have risen by around 10% since 2007. Out of work benefits have gone up by around 20%. That's not fair to working people who pay the taxes that fund them."

Citizens Advice chief executive Gillian Guy said that Mr Osborne's announcement amounted to a recognition that the welfare budget had been "squeezed dry" and that deeper cuts ahead of the introduction of Universal Credit would be "reckless".

Learning disability charity Mencap expressed relief that benefits for disabled people and carers will increase in line with inflation, but said it was "seriously concerned" that ESA - which replaced Incapacity Benefit - will only increase by 1%.

Chris Johnes, Oxfam's director of UK poverty, said: "This fresh round of benefit cuts will pull the rug from under the feet of those already on the edge of destitution. The Government should be going further and faster in clamping down on tax avoidance rather than making the poorest people foot the bill for economic failure."