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Osborne's plan to freeze welfare payments in crisis after rumours of Lib Dem veto

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UPDATED:

04:29 GMT, 2 December 2012

George Osborne was fighting a rearguard action last night to force through a freeze in welfare payments amid reports that the move has been vetoed by Liberal Democrat Cabinet colleagues Nick Clegg and Vince Cable.

Government sources say the Chancellor could announce that the dole and other state handouts may go up by more than one per cent – close to the rise in earnings – after the Lib Dems claimed a freeze would be ‘cruel’ to the poor.

It would mean he would save only half the 4 billion he had hoped to get over the next two years to help dig the UK out of the red.

Chancellor George Osbourne, left, could announce that the dole and other state handouts may go up by more than one per cent after the Lib Dems, lead by Nick Clegg, right, claimed a freeze would be cruel to the poor

Chancellor George Osbourne, left, could announce that the dole and other state handouts may go up by more than one per cent after the Lib Dems, lead by Nick Clegg, right, claimed a freeze would be cruel to the poor

Chancellor George Osborne, left, argued that it was grossly unfair for the income of those out of work to go up by more than those in work, but Nick Clegg, right, dug his heels in over the welfare freeze plan after David Cameron objected to the Lib Dems’ demand for a ‘mansion tax’ on homes worth more than 1 million

The Chancellor, strongly backed by Work and Pensions Secretary Iain Duncan Smith, wanted to freeze most state benefits, with pensions and disability the main exceptions, to try to cut the Government’s mounting deficit.

Instead, he faces having to agree to a rise of about one per cent to win Lib Dem approval for his Autumn Statement on Wednesday.

Welfare payments usually go up in line with prices. But last year that resulted in a massive five per cent leap, while workers had to make do with pay rises of less than half that.

Mr Osborne argued that it was grossly unfair for the income of those out of work to go up by more than those in work. Immediately after the five per cent benefit rise, inflation fell dramatically.

He and Mr Duncan Smith wanted to redress the balance – and save 4 billion – by using the Autumn Statement to announce a freeze of key benefits for two years.

An increase of more than one per cent would be a setback to Mr Osborne’s publicly stated aim of reducing the welfare budget by 10 billion over the next five years.

Mr Osborne is also understood to have shelved plans to withdraw housing benefit for the under-25s, which would have saved 1.5-billion, after Lib Dem objections led by Business Secretary Vince Cable, pictured

Mr Osborne is also understood to have shelved plans to withdraw housing benefit for the under-25s, which would have saved 1.5-billion, after Lib Dem objections led by Business Secretary Vince Cable, pictured

Conservative officials denied they had caved in, claiming that a one per cent rise was ‘a major improvement’ on last year’s five per cent.

And welfare campaigners are certain to complain that it represents a real-terms cut in the standard of living for those on benefits.

Treasury sources last night said that no final decision had been made, though the Lib Dems claim they have won a key concession in the Coalition tug-of-war over the Autumn Statement.

Mr Clegg dug his heels in over the welfare freeze plan after David Cameron objected to the Lib Dems’ demand for a ‘mansion tax’ on homes worth more than 1 million.

The Chancellor was prepared to accept a watered-down version of the mansion tax in return for a welfare freeze, but Mr Cameron complained it would hit Tory voters in the Home Counties, where property prices are high.

Mr Osborne is also understood to have shelved plans to withdraw housing benefit for the under-25s, which would have saved 1.5 billion, after Lib Dem objections led by Business Secretary Mr Cable.

Lib Dem anger over Tory welfare cuts surfaced last month when former Lib Dem Minister Sarah Teather denounced them as ‘immoral’.

Mr Osborne is expected to unveil other measures to meet Lib Dem calls for the well-off to pay more tax. But Government sources say Lib Dem plans to slash pension tax relief for high-earners from 50,000 to 30,000 have been turned down.

They refused to comment on claims that stamp duty on multi-million-pound home purchases could be increased.

The cost of welfare spending has surged by almost eight per cent in the past year, far outpacing the rise in average pay.

Total welfare spending, including pensions, has risen 15 per cent over the past three years.