Public sector pay and welfare budgets could take the biggest hits, prime minister warns

Public sector pay and welfare could bear the brunt of budget cuts as the UK faces years of “pain”, the prime minister has warned.

David Cameron said the economy is in a far worse state than previously thought.

Measures being considered to help control the £156bn deficit are now thought to include benefit freezes and below-inflation pay rises for state employees following next year’s planned freeze.

Cameron is also expected to outline today that the cuts will mean the UK’s “whole way of life” will be disrupted for years and will effect everyone.

On Tuesday, chancellor George Osborne will outline a framework for an autumn spending review that will introduce department-by-department cost savings. The most radical plan will involve importing a Canadian-style ‘star chamber’, in which members of the Cabinet will be forced to justify their budgets in front of a group of ministerial and civil service heavyweights.

Speaking to the Sunday Times, Cameron warned there would be no “trampoline recovery” of the economy and there was a “serious problem” with forecasts made by Labour of a 3% growth next year.

He said: “There is a huge amount of debt that has got to be dealt with. Crossing our fingers, waiting for growth and hoping it will go away is simply not an answer.

“You have to address the massive welfare bills. You have to address public sector pay bills. You have to address the size of the bureaucracy that has built up over the past decade.

“Otherwise you will have to make reductions across the board which you don’t want to do. We need to address the areas where we have been living beyond our means.”

It is thought freezing all benefits for 12 months next year could be on the table and would raise £4.1bn.

All public sector workers earning more than £18,000 a year already face a pay freeze next year, but it is understood that curbs in wage rises beyond 2011 are likely to be unveiled in the Budget on 22 June.

Meanwhile, deputy prime minister Nick Clegg has promised the need for savings will not mean a return to the savage cuts of the 1980s.

He told the Observer: “It is important people understand that fiscal retrenchment does not mean a repeat of the 1980s. We’re going to do this differently.”

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