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By Andrew Osborn
LONDON (Reuters) - Chancellor George Osborne tried to limit political fallout from the biggest overhaul of Britain's welfare state in decades on Tuesday, saying the country could no longer afford a system he said was "broken".
In a rare political speech, given to supermarket workers in Sittingbourne in Kent, Osborne sought to justify changes including a cap on welfare benefits that church leaders and the Labour opposition have called callous and to defend his policies which have brought slower-than-expected economic recovery.
Osborne knows changes to a 200 billion pound-per-year system that swallows more than a third of his budget is fraught with risk for the ruling Conservative party ahead of local elections next month and a 2015 general election.
Critics accuse his party of governing in the interests of the rich and it is the less well off who will bear the brunt of changes, even though the welfare budget is being restructured and its growth curbed rather than being cut in nominal terms.
The changes are part of a drive to get Britain's large public sector deficit down in a year when the economy is only forecast to expand by 0.6 percent, but Osborne said they were also meant to restore fairness.
"For too long, we've had a system where people who did the right thing - who get up in the morning and work hard - felt penalised for it, while people who did the wrong thing got rewarded for it," he told Morrisons supermarket workers.
"The system became so complicated, and benefits so generous, that people found they were better off on the dole (on unemployment benefits) than they were in work."
Some of the new rules start to bite this week, while others will take effect later this year.
The welfare budget includes pensions and tax credits as well as unemployment, sickness, housing, local tax and child support benefits. Such benefits have traditionally risen in line with inflation but will rise by just 1 percent between 2014 and 2016.
Other measures include an overall cap on welfare benefits, less help for people to pay their local council tax, and lower rental assistance to households deemed to have more rooms than they need. The government describes this as ending a "spare bedroom subsidy," the opposition as imposing a "bedroom tax".
Osborne said criticism from church leaders and Labour was "ill-informed rubbish", saying it was not the end of the welfare state, the product of a post-World War Two Labour government.
He said nine out of ten households would be better off due to a decision to raise the amount of money you earn before you pay tax and defended a move to cut the top rate of tax.
Labour have called the measure "a tax cut for millionaires" but Osborne said the outgoing higher tax rate had brought in less not more money and had discouraged people from investing.
The Conservatives - who rule in coalition with the Lib Dems - have had image problems in the past with Theresa May, now interior minister or home secretary, once saying people viewed them as "the nasty party".
Portrayed by Labour as a bunch of millionaires who are out of touch with ordinary people, the fact many senior Conservatives including Prime Minister David Cameron come from privileged backgrounds has made it harder for them to counter that charge. They trail Labour in polls by 10 percentage points.
But cuts to welfare may prove popular with parts of the electorate. According to a survey by pollsters ComRes in November, 64 percent of respondents said the benefit system was not working well or was failing and 40 percent thought at least half of claimants were "scroungers".
Ed Balls, Labour's finance spokesman, said most families would be worse off as a result of Conservative policies.
"Figures from the independent IFS show that the average family will be 891 pounds worse off this year because of tax and benefit changes since 2010," he said in a statement.
People in east London spoken to by Reuters were negative about the changes and said they feared for the future.
"It's a bad policy. What do they expect people to do?," said Almas Ali, 38, who said he and his wife couldn't work because they had to care for their disabled daughter.
"You will find a lot of people on benefits who are going to suffer big time."
(Additional reporting by Shadia Nasralla; Editing by Jason Webb)