Spending Review 2010: George Osborne wields the axe

Chancellor George Osborne has unveiled the biggest UK spending cuts for decades, with welfare, councils and police budgets all hit.

The pension age will rise sooner than expected, some incapacity benefits will be time limited and other money clawed back through changes to tax credits and housing benefit.

A new bank levy will also be brought in - with full details due on Thursday.

Mr Osborne said the four year cuts were guided by fairness, reform and growth.

But shadow chancellor Alan Johnson, for Labour, called the review a "reckless gamble with people's livelihoods" which risked "stifling the fragile recovery" - a message echoed by the SNP, despite smaller than expected cuts in Scotland.

Mr Osborne ended his hour-long Commons statement by claiming the 19% average cuts to departmental budgets were less severe than expected. This is thanks to an extra £7bn in savings from the welfare budget and a £3.5bn increase in public sector employee pension contributions.

'Frontline cuts'

The chancellor claimed it meant his savings were less than the 20% cuts Labour had planned ahead of the general election.

BBC Economics Editor Stephanie Flanders said that, at first glance, "the cuts to the welfare benefit are regressive, in the most basic sense of costing families in the lower half of the income distribution more".

Local councils are also in the firing line, with the amount of money they receive from government cut by 7.1% from April.

The Local Government Association said the move would "hit councils and the residents they serve very hard and will inevitably lead to cuts at the frontline".

Outlining the £81bn cuts package, Mr Osborne vowed to restore "sanity to our public finances and stability to our economy".

He told MPs: "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt.

"It is a hard road, but it leads to a better future."

The main new welfare savings come from withdrawing Employment and Support Allowance, the replacement for incapacity benefit, for some categories of claimant after one year, raising £2bn.

Universal benefits for pensioners will be retained as budgeted for by the previous government and the temporary increase in the cold weather payment will be made permanent.

But a planned rise in the state pension age for men and women to 66 will start in 2020, six years earlier than planned.

In other measures, rail fares will be allowed to increase by 3% above RPI inflation from 2012, higher education spending will be cut by 40%, flood defences by 15% and sport England and UK Sport cut by 30%.

Heated negotiations

Up to 500,000 public sector jobs could go by 2014-15 as a result of the cuts programme, according to the Office for Budgetary Responsibility.

Mr Osborne has not set out in detail where the jobs will go but he admitted there will be some redundancies in the public sector, which he said were unavoidable when the country had run out of money.

Government departments facing major cuts to their budgets include the Home Office, on 6%, including a 20% cut in government funding for police over four years, the Foreign Office, facing 24% cuts, and the Cabinet Office, which will see its budget slashed by 35%.

The justice department is facing cuts of 6%, with 3,000 fewer prison places over four years.

Winners include the Department for International Development, which will see its budget rise to £11.5bn over the next four years, reaching 0.7% of national income in 2013.

The science budget will be ringfenced and the increase for the NHS over the whole spending period has been confirmed as 0.4%, or 0.1% a year.

The schools budget will rise from £35bn to £39bn and, overall, the Department for Education will be required to find resource savings of just 1% a year.

Each government department will next month publish a business plan setting out reform plans for the next four years.

The government will also deliver £6bn of Whitehall savings - double the £3bn promised earlier, said the chancellor.

He also confirmed that the budget for new social housing would be cut by 60% over four years, and rents for new tenants would be brought closer to private sector rates, with the money raised to go towards building new affordable homes.

Campaign groups reacted angrily to the move, with the National Housing Federation calling it "a devastating blow to the millions of low income families currently stuck on housing waiting lists".

The Spending Review is the culmination of months of heated negotiations with ministers over their departmental budgets and comes a day after the Ministry of Defence and the BBC learned their financial fate.

Tough action

The MoD is facing cuts of 8% - less than most other departments but enough to mean 42,000 service personnel and civil servants will lose their jobs over the next five years and high-profile equipment such as Harrier jump jets, the Ark Royal aircraft carrier and Nimrod spy planes will be scrapped.

The BBC has been told it must freeze the licence fee for six years and take over the cost of the World Service, currently funded by the Foreign Office, and the Welsh language TV channel S4C. This adds up to an estimated 16% cut in the BBC's budget in real terms.

The chancellor insists tough action on spending is needed to stave off a debt crisis - and that the private sector will create new jobs to fill the void.

Labour would also have had to make major cuts if they had won the general election, but the party insists Mr Osborne's plans were too aggressive and risked tipping the country into a "double dip" recession.

During raucous Commons exchanges, shadow chancellor Alan Johnson accused Tory backbenchers of cheering "the deepest cuts to public spending in living memory".

He claimed that for some on the government benches cuts were an "ideological objective" and "what they had come into politics for".