Welfare budget faces further £7bn in cuts

Spending review in full

The current "complex" system of means-tested working age benefits and tax credits will gradually be replaced by a Universal Credit that will "sharpen" work incentives and reduce fraud and error, Mr Osborne said.

But he pledged that low income families with children would be protected from the adverse effects of the "essential savings".

One way this would be achieved was through an increase in the child element of the Child Tax Credit by a further 30 in 2011-12 and 50 in 2012-13 above inflation, he said

He defended the decision to axe child benefit for high earners and scotched speculation that it would be scrapped for all children over 16.

The package of welfare reforms includes freezing the working tax credit for three years from next April, changing working tax credit eligibility and ending payment of the mobility component of the Disability Living Allowance.

The Government announced welfare savings of 11 billion in June's emergency budget, so the total is now 18 billion a year by 2014/15.

A White Paper will soon be published by the Work and Pensions Department which will give details of 2 billion being set aside to fund the new Universal Credit.

A new work programme is also being launched, offering personalised support for jobseekers with the greatest barriers to employment.

Private and 'third sector' providers will be paid on the basis of additional benefit savings they make.

The DWP's administration budget will also be reduced by 35% and its core budget reduced by 26% in real terms by 2014/15 by cutting corporate overheads, reducing the costs of benefit processing and replacing "wasteful and ineffective" welfare to work programmes.

The department said it will stop issuing National Insurance cards to customers and send letters instead, saving the taxpayer 1 million a year, stop issuing a remittance advice with every weekly payment of a back to work credit or training premium, saving up to 3 million a year, and change how Jobcentre Plus measures performance, cancelling at least two target management contracts, with an annual saving of at least 1.2 million.