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Some benefits will be increased at a lower level than the rising cost of living, George Osborne has announced.

Many working-age benefits will go up by 1% in each of the next three years, lower than both the current rate of inflation and the rate experts predict.

The Treasury's welfare bill will be increasingly cut as a result, cutting it by £3.7bn in 2015-16.

Some other payments, such as disability benefits, will not be affected as they are governed by other rules.

And the state pension will rise by 2.5%, or £2.70 a week, taking the payment to £110.15 a week.

Changes

The rate of consumer prices index (CPI) inflation in September - which stood at 2.2% this year - is often used to work out the rise in a range of benefits from the following April.

In April this year, a variety of benefits, such as disability and maternity benefits, rose by 5.2%, because CPI inflation was 5.2% in September 2011.

However, the rise in these benefits will be much lower in April 2013. Some, such as carer benefits and the disability element of tax credits, will go up by 2.2%, but other benefits will only rise by 1%, Mr Osborne announced.

They include Jobseeker's Allowance, employment and support allowance, and income support, as well as maternity, paternity and adoption pay for those in work, and maternity allowance for those out of work.

"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," the chancellor said.

Mr Osborne said the benefits would rise by 1% for the next three years, irrespective of the level of inflation.

The most recent CPI figure was from October, when it was 2.7%.

Welfare 'squeezed dry'

"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%," Mr Osborne said.

"That's not fair to working people who pay the taxes that fund them. Those working in the public services, who have seen their basic pay frozen, will now see it rise by an average of 1%.

"A similar approach of a 1% rise should apply to those in receipt of benefits. That's fair and it will ensure that we have a welfare system that Britain can afford."

The measure will save the chancellor £505m next year, and changes to welfare as a whole will save £3.7bn in 2015-16.

Labour's shadow chancellor Ed Balls said the savings might prove to be less than expected owing to long-term unemployment. He also questioned the fairness of the changes.

"What sort of government believes that you can only make low-paid working people work harder by cutting their tax credits but you only make millionaires work harder by cutting their taxes?" he said.

Gillian Guy, chief executive at charity Citizens Advice, said: "At last we have some recognition that the welfare budget has been squeezed dry.

"Holding down benefit increases to 1% is better than a total freeze, which would have been disastrous for people on the lowest incomes already having to spend a higher proportion of their income on essentials when rents, food and heating bills are all rocketing.

"The government can't keep hitting the same people over and over again. Let's not forget, below inflation benefit increases will not just hit people who are out of work. It will also hurt working families in low paid jobs who have already been hit by wage freezes and cuts in working hours."

She said many of these people were on a "financial cliff edge".

Alison Garnham, chief executive of Child Poverty Action Group, said: "The bottom line is that the decisions taken by the chancellor will plunge tens of thousand more children into poverty whether their parents are working, unemployed, sick or disabled."

The basic state pension will rise by 2.5% as a result of a government guarantee, known as the "triple lock", which sees it rise by the higher of CPI inflation, average wages or 2.5%.