Axe falls as Britain gears up for biggest cuts since 1976

Chancellor slashes welfare bill by £18bn to shield departments

Middle class child benefit cut will affect 300,000 more families

Businesses furious at plans for new £1bn carbon stealth tax

Police and prisons hit hard but hospitals and schools protected

Rail fares to soar by 20 per cent over next three years

GEORGE Osborne yesterday unveiled the biggest spending cuts since 1976, as he wrong-footed his Labour opponents by raiding the welfare budget to soften departmental cuts.

“Today’s the day when Britain steps back from the brink, when we confront the bills from a decade of debt,” the chancellor said as he unveiled £81bn of savings across the public sector.

Osborne claimed he had limited real-terms cuts in departmental expenditure to an average of 19 per cent over four years, but he paid for this by announcing £7bn of extra welfare savings on top of the £11bn unveiled in his June Budget.

He axed child benefit for higher-rate taxpayers from 2012 as expected, although the change will affect 300,000 more families than previously thought. The measure – which affects some 1.5m households – will save the exchequer £2.5bn by 2014-15.

In a shock move, the chancellor announced a £1bn-a-year carbon stealth tax on big businesses, earning him widespread condemnation from those affected. Banks were also threatened with higher taxes, although there was a softening in the rhetoric against the financial services sector.

“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad. Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services,” Osborne said.

He received plaudits for sticking to the spending cuts he set out in his June budget, which he hopes will eliminate the £109bn structural deficit by the end of the parliament.

Scotching suggestions he would delay deep cuts until economic growth was stronger, the chancellor insisted that the 500,000 reduction in the public payroll would be offset by private sector job creation.

Although front-line services like schools, hospitals were shielded from the worst of cuts, the axe will fall hard on state funding for university teaching, social housing, prisons, police and local councils.

And while some big transport projects have been spared – such as Crossrail and the London Underground upgrades – there will be massive rises in train fares and big cuts to subsidies for bus companies.

Elsewhere, the chancellor aims to save £1.8bn a year by 2014-15 by increasing the amount that public sector workers must contribute to their pensions. Treasury officials said the figures implied that employees would have to increase contributions by three per cent, equating to a significant real-terms pay cut.

The state pension age for men and women will rise to 66 by 2020, six years earlier than planned, a move that will save around £5bn a year by the end of the next parliament.

Osborne repeatedly insisted the measures were fair, a claim that was instantly dismissed by Labour, who accused the coalition of cutting spending to achieve a long-held ambition to shrink the state.

As well as cuts to middle class benefits, there were big reductions in welfare for the poorest.

Incapacity benefit was slashed, saving over £2bn a year by the end of the parliament while housing benefit was cut for the under 35s, saving £215m. The government also scaled back the working tax credits scheme, bringing in savings of £1.4bn.