SPENDING REVIEW: Public sector workers to lose automatic pay rises

In a Spending Review for 2015/16 which extended the age of austerity beyond the next general election, Mr Osborne also stripped expat pensioners in warm countries of the right to claim winter fuel payments, and gave further details of a new Welfare Cap which will 'put a limit on the nation's credit card' from 2015. But he had a £100 boost for council tax payers, offering funding to allow local authorities to extend the freeze on bills for a further two years.

And he said that £300 billion of investment over the next six years in capital projects would boost sustainable growth and help 'turn Britain around'.

Chief Secretary to the Treasury Danny Alexander will unveil £100 billion worth of specific infrastructure plans, expected to include new roads, railways, science facilities and schools, in a statement to the Commons tomorrow.

In a highly political statement to the House of Commons, Mr Osborne claimed that the UK was 'moving out of intensive care, and from rescue to recovery' and challenged Labour to say whether it will accept new restrictions on welfare spending.

But his announcements put him on collision course with the unions, with TUC general secretary Frances O'Grady denouncing his package as 'a toxic mix of bad economics, nasty politics and dishonest presentation'.

And Labour described his statement as a 'con', pointing out that there was no new money for infrastructure, while the £50 billion capital spending announced for 2015/16 amounted to a 1.7% cut in real terms.

'They have done nothing - zero,' said shadow chancellor Ed Balls. 'It's a complete capital spending con. There is nothing here.'

Mr Balls said the new round of cuts represented a 'comprehensive failure' of Mr Osborne's economic strategy, telling MPs: '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.'

But Mr Osborne insisted his measures, which only spared schools, the NHS, overseas aid and the intelligence services, were based on the principles of reform, growth and fairness, and would ensure that the wealthiest fifth of society bear the biggest burden.

Total state spending in 2015/16 will be £745 billion - £120 billion lower than if it had continued to rise after 2010 at the rates seen in previous years - he said.

He told MPs: 'The decisions we take today are not easy, and these are difficult times. But with this statement we make more progress towards an economy that prospers, a state we can afford, a deficit coming down and Britain on the rise.'

Public sector pay rises will be limited to an average of up to 1% for 2015-16, while the 'antiquated' system of automatic progression pay - which rewards employees with an upgrade for each year of service - will be scrapped in the civil service, schools, the NHS, prisons and police, though not the armed forces.

The move prompted union outrage, with the GMB branding it 'another unpleasant dig at public sector workers who have already been made scapegoats for problems they had nothing to do with.'

Mr Osborne's welfare cap will come into force in April 2015, requiring future chancellors to fix a limit in their budgets for spending in each of the next four years on a set of benefits - and explain to Parliament if it is breached.

Housing benefit, tax credits, disability benefits and pensioner benefits will all be included in the cap, but the state pension and unemployment benefits will not.

Mr Osborne also announced the introduction of a new seven-day wait before people can claim benefits and said that new claimants will be required to produce a CV and start looking for work online before receiving welfare.

Some 100,000 benefit claimants who do not speak English will be required to take lessons, with the state picking up the £100 million annual bill for language courses. Half of all jobseekers will be required to come to the Job Centre every week, rather than once a fortnight .

And lone parents with children aged three or four will have to attend Job Centres and show they are preparing for work.

In what Liberal Democrats were claiming as a victory for Deputy Prime Minister Nick Clegg, the £350 million saved through the new 'contract with people on benefits' will be recycled into additional support for people to get jobs, such as language lessons and more frequent interviews.

Local government resource budgets will be reduced by 10% in 2015/16, but Mr Osborne claimed that actual spending would be reduced by only 2%.

Local Government Association chairman Sir Merrick Cockell said the cut would 'stretch essential services to breaking point in many areas'.

Scotland, Wales and Northern Ireland do not escape the squeeze, with all three required to find savings of 2%.

The Ministry of Defence faces further cuts to its civilian workforce as its budget was maintained in cash terms at £24 billion - representing a real-terms cut.

But the equipment budget will rise by 1% per annum and there will be no further reductions in military personnel. The intelligence services - MI5, MI6 and GCHQ - emerged among the winners with a 3.4% increase in their annual budget.

But there will be cuts of 6% at the Home Office, 8% at the Foreign Office and 7% at the Department for Culture, Media and Sport - although funding for elite sports will be protected.

The Chancellor promised investment in education and accelerated school reform, with the overall budget of the Education Department increasing, school spending protected in real terms and 180 new free schools in 2015/16.

He also announced schools spending will be allocated in a 'fairer way' so the lowest funded local authorities will receive an increase in their per pupil funding through a new national funding formula.

John Cridland, Director General of the CBI , said: 'The Chancellor has carefully walked a tightrope of protecting growth, while making sizeable savings to pay down the debt.

'Infrastructure is rightly singled out as the most effective engine for growth, as we urged. While the Government talks a good game on infrastructure we've seen too little delivery on the ground so far.

'It is critical we see a real pipeline of projects announced tomorrow, so investors know what schemes are going ahead, where and when.'

But Ms O'Grady said: 'The last thing our struggling economy needs is further cuts to spending to try to close a deficit made worse by the Chancellor's earlier cuts.

'Many services will be hard hit. Worst of all is a new attack on some of the most vulnerable in our society through the seven-day wait and other conditions for social security payments. The Chancellor may think attacks on welfare go down well with voters, but these will lead to parents not having enough cash to feed their children.'