Chancellor George Osborne tells MPs Britain will have to endure another £11.5bn of cuts, with further pain for public sector workers. But infrastructure spending will receive a boost.
Mr Osborne had hoped the budget deficit – the difference between what governments spend and raise in taxes – would be eliminated by 2015, when the next election will be held.
But sluggish growth, and low tax receipts, mean further cuts in 2015-16, with Labour saying it will stick to the coalition’s spending limits if it wins the election.
Of the £11.5bn of cuts, Mr Osborne said £5bn would come from efficiency savings.
Automatic pay progression for public sector workers will end, although the armed forces will be excluded, and everyone working in the state sector will receive an average pay award of 1 per cent in 2015-16.
On welfare, Mr Osborne is introducing a cap on total spending (excluding the state pension), an end to winter fuel payments for pensioners living in hot countries, seven-day waits before people can sign on for benefits, and a requirement that claimants should learn English.
Health, schools and overseas aid are protected, which means other government departments are taking the strain.
But capital spending on infrastructure, which has halved over recent years, will rise in future to boost growth, with £50bn of this kind of spending in 2015 and a total of £300bn over the decade.
Councils, which were hit hard in the 2010 comprehensive spending review (CSR), are also facing cuts of 10 per cent this time around, but the government is to provide funding to allow council tax bills to be frozen for another two years.
The Home Office is having to cope with spending reductions of almost 6 per cent. The Ministry of Defence is also hit, but only civilian jobs will be cut.
The Department of Culture and Business Department are also among the losers in the spending review.
These reductions are on top of the average 19 per cent spending cuts that non-ringfenced departments have had to cope with since 2010.
In contrast, Mr Osborne announced that the intelligence agencies – MI5, MI6 and GCHQ – will receive real-terms increase of more than 3 per cent, following the murder of Drummer Lee Rigby in Woolwich.
Mr Osborne told the Commons the British economy was leaving “intensive care”, adding: “We’re saving money on welfare and waste to invest in the roads and railways, schooling and science our economy needs to succeed in the future.
“I know that times are still not easy for families. But we have a clear economic plan. We’ve stuck to it. It is working. And I’m determined to go on delivering it.”
He said that billions of pounds of additional investment are to be directed into major infrastructure projects to boost growth this decade, with details set out by Treasury Chief Secretary Danny Alexander on Thursday. Capital spending has halved in recent years.
The money will be spent on roads, rail, bridges, broadband, science and schools. Mr Osborne said it would be the biggest investment in roads for 50 years and in railways since the Victorian era.
Labour argues that there have been “three years of failure” since 2010 and the slowest economic recovery for over 100 years, with growth of just 1.1 per cent, compared to the 6 per cent predicted at the time.
Shadow chancellor Ed Balls said the new round of cuts represented a “comprehensive failure” of the Chancellor’s economic strategy.
He said: “This out of touch chancellor has failed on living standards, growth and the deficit and families and businesses are paying the price for his failure.”
Speaking on BBC Radio 4’s Today programme, Paul Johnson, head of the Institute for Fiscal Studies think tank, said there was “a good chance” there would be tax rises after the next election.