Asylum-seekers have become early victims of the squeeze on government spending in the face of the economic crisis.

Allowances for people who claim refuge in Britain will be cut or frozen in the autumn in an effort to reduce the size of the asylum budget.

The "penny-pinching" reductions provoked fury last night with ministers facing accusations they were penalising some of the most vulnerable members of society. They were also warned that the reductions would force refugees into destitution. Under the moves, the subsistence allowance paid to single asylum-seekers aged 25 and over will be slashed from £42.16 to £35.13 a week in October. The cash is intended to cover their living costs while they wait for their claims to be assessed.

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In future, single asylum-seekers – the majority of applicants – will be expected to exist on just £5 a day. Under government rules they are not allowed to increase their income by working. The revised rates will apply to new asylum applicants rather than those already in the system. The allowances paid to lone parents will be frozen at the current level of £42.16.

Asylum support payments have traditionally been raised in line with the rate of inflation in the previous September, which would have entitled claimants to an increase of more than 5 per cent this year. But the Home Office has ruled that such increases cannot be afforded this year.

In a letter seen by The Independent, the UK Border Agency tells asylum groups that the 5.2 per cent rate represented a "significant annual peak".

It says: "You'll appreciate that this review has taken place in a difficult economic climate and that our asylum support budget presents a significant financial challenge to the Agency.

"In this context, we have considered a number of different factors in setting the support rates for the coming year to ensure that the essential living needs of asylum-seekers are met within current budgetary constraints."

Support for failed asylum-seekers who are awaiting removal – a process that can take years – is also being frozen at £35 a week.

Sandy Buchan, the chief executive of the charity Refugee Action, said: "Everyone is aware we are facing difficult economic times, but we cannot understand why the Government would seek to penalise the poorest in this way.

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"Those seeking sanctuary are already the most vulnerable members of society, and to target them, especially lone parents with dependent children, seems unjustifiably harsh.

"It is also difficult to see how the spectacle of ever greater numbers of asylum-seekers sleeping rough or begging on our streets will assist community cohesion or increase public confidence in ministers' management of housing and immigration policy."

Asylum-seekers who have nowhere to live when they arrive in Britain are dispersed to accommodation around the country.

Originally they were issued with vouchers to cover the cost of food. But the scheme was scrapped in the face of accusations that it was stigmatising asylum-seekers. It was replaced with cash payments from post offices.

The payments have been uprated in line with the level of the Consumer Price Index in September, which was 5.2 per cent last year.

Refugee groups learned of the revised rates, which will be introduced on 5 October, earlier this month. They have protested over the move in meetings with Home Office officials.

The over-25 single person rate is being reduced to bring it in line with allowances paid to asylum-seekers aged 18 to 24.

Refugee Action claimed single people over 25 would have had an increase of £2.19 a week if allowances had been put up by 5.2 per cent. Instead the support offered to new claimants is being trimmed by £7.03. A 5.2 per cent rise would have also boosted allowances for single parents by £2.19. Instead their support is being frozen.

Last night the UK Border Agency pointed out that some rates – such as that to support couples and asylum-seeking children – was being raised by 5.2 per cent.

But it explained that it did not believe asylum applicants aged over 25 needed larger allowances as they did not have housing costs, or water, gas or electricity bills because they lived in accommodation provided for them.

But Chris Huhne, the Liberal Democrat home affairs spokesman, said: "Many asylum-seekers are already left destitute by the Government's incompetence and these penny-pinching cuts will make life harder still.

"Britain's proud record of providing sanctuary to the oppressed is undermined by forcing people to get by on £35 a week. The easiest way to cut the asylum budget would be to let asylum-seekers work to support themselves. It is ridiculous that the Government won't even consider this for people who have waited months for a decision.

"Ministers have managed to create a system that is both inefficient and inhumane."

Case study: 'We didn't know where to go'

Sysay Tedros, 26, from Eritrea, fled to the UK with her mother and younger sister in 2000 aged 17, after her father was arrested and imprisoned in Ethiopia. She has since been granted refugee status and now lives in Manchester with her young daughter. In 2003 she discovered that her father had died after he was beaten in prison, but she still does not know where he is buried.

"Three months after we arrived in the UK we were put on a bus and sent to Manchester. We were given some paperwork and some vouchers rather than money – it took 10 hours to get to our house. We arrived in a car park and a man picked us up in a car and took us to a house in Moston.

"He gave us some milk, cornflakes and bread and butter and went. We didn't know how to use the cooker and for four or five days we just ate cold food. We just knew we were somewhere in England and didn't know where to go. There was no electricity or heating or anything. We spent all our money calling the landlord, who never came. There was water coming through the ceilings, under the door and damp everywhere. My mother got £25 worth of food vouchers and £10 in cash. At the time there were only a few shops where you could use the vouchers. You couldn't use them in markets where you could get cheap fruit and vegetables, and when you took them out, people changed their view of you. It was hurtful.

"I used to walk to and from college every day for over a year, because we couldn't afford to spend any of the cash on transport. I was a teenager, but I couldn't go into town or the cinema or do any of the things a 17-year-old girl might do.

"It was hard for my mother, because she was illiterate and had left her husband and her whole life behind. She didn't have enough money to call her family, so she couldn't find out where her other children were, which made her feel extremely guilty all the time.

"Now, I work to support myself and don't have a problem, but lone parent asylum-seekers only get £43 per week. It's very difficult to survive on this as a single mum with children under five, especially during a recession. I see families who are struggling all the time."