LONDON (Reuters) -British finance minister Jeremy Hunt said on Thursday public spending would grow more slowly than the economy, with a real terms squeeze in spending in many departments, though overall spending in public services will rise over the next five years.
Hunt said just over half of the needed 55 billion pound ($65.2 billion) fiscal consolidation would come from cuts in spending.
"We are going to grow public spending - but we’re going to grow it slower than the economy," Hunt said in a speech to parliament.
Hunt said for the remaining two years of the government's Spending Review, it would protect the increases in departmental budgets it had already set out in cash terms, a sharp real terms cut given high rates of inflation.
"And we will then grow resource spending at 1% a year in real terms, in the three years that follow," Hunt said.
"Although departments will have to make efficiencies to deal with inflationary pressures in the next two years, this decision means overall spending in public services will continue to rise, in real terms, for the next five years."
Hunt said he would raise state retirement and welfare benefits payments by 10.1% - in line with inflation.
Hunt said it would not be possible to restore the aid budget to 0.7% of gross national income from its current level of 0.5% because of the "significant shock to public finances".
But he announced 3.3 billion pound increase in the National Health Service's budget this year and next, and a rise in spending for social care and schools over the next two years.
The Office for Budget Responsibility said that funding increases for the NHS, social care and schools were largely offset by the reduction in aid spending.
It added that 1% real terms increases in current departmental spending would reduce cash spending "by amounts rising to 22.2 billion in 2027-28," compared to the prior assumption it would rise in line with nominal GDP.
Torsten Bell, chief executive of the Resolution Foundation think tank, said there were also real-terms cuts in investment spending.
He said that while there was "no good news for public services," the fiscal statement did not represent a return to the austerity of the coalition government of 2010-2015, adding there were "smaller day-to-day cuts than expected".
Hunt delayed a decision on increasing defence spending, saying a new integrated review on security policy was needed and he would update again in the next budget.
($1 = 0.8434 pounds)
(Reporting by David Milliken and Alistair Smout; editing by Michael Holden and Toby Chopra)