BENEFITS and tax credits will continue to be cut in real terms until 2018, Nick Clegg has suggested – potentially paving the way for a fresh deal with the Conservatives.

Quizzed by The Northern Echo, the Liberal Democrat leader hinted he favoured carrying on the current one per cent cap for a further two years “until the deficit is dealt with”.

The cap is a real-terms cut – because it is below inflation – and has been criticised by experts for triggering a looming surge in the number of children living in poverty.

But Mr Clegg insisted a one per cent cap was “very different” to the Tory plan to freeze benefits and tax credits, which he has condemned as “beating up on the poor”.

And he warned tough measures would be necessary until the Government had “balanced the books” – which was forecast to be in 2018.

Asked if that meant real-terms cuts until then, Mr Clegg replied: “The one per cent increase in benefits was a necessary cost-saving measure - and we have never hidden the fact that we will need to continue to make necessary cost-saving measures until the deficit is dealt with.”

A “semblance of normality to supporting vulnerable people” would only return after the 2017-18 financial year, he suggested.

The difference between a freeze and one per cent was “not huge” in a single year, Mr Clegg admitted, but added: “I tell you, it’s a gulf over the next ten years, if you compare our approach with George Osborne’s.”

Despite the Chancellor’s threat of a freeze, there is growing speculation that the Coalition parties could reach agreement on continuing the one per cent cap, after the election.

The Lib Dems are expected to demand extra council tax bands – the so-called ‘mansion tax’ – in return, in a plausible post-2015 deal.

The independent Institute for Fiscal Studies has pointed to real-terms benefits cut as a prime reason for its prediction that 900,000 more children will be plunged into poverty by 2020.

Critics have also seized on the fact that growing numbers of those affected are people in low-paid work, receiving tax credits.

They include around 200,000 households in the North-East and North Yorkshire, of which at least 160,000 have children and around 65,000 are lone parents.

But Mr Clegg insisted his approach was far less harsh than the Chancellor, who – in ruling out tax hikes on the wealthy – would put “a massive strain on public services”.

He warned: “Your local police force, your local social care homes - your schools for goodness sake - will be cut to the bone. There’s nowhere else to go.”