Spending Review: Chancellor's speech in full

Mr Speaker. Today is the day when Britain steps back from the brink. When we confront the bills from a decade of debt.

A day of rebuilding when we set out a four-year plan to put our public services and welfare state on a sustainable footing - for the long term.

So that they can do their job - providing for families, protecting the vulnerable and underpinning a competitive economy. It is a hard road, but it leads to a better future.

We are going to bring the years of ever-rising borrowing to an end. We are going to ensure, like every solvent household in the country: that what we buy, we can afford; that the bills we incur, we have the income to meet; and that we do not saddle our children with the interest on the interest on the interest of the debts we were not ourselves prepared to pay.

Tackling this budget deficit is unavoidable. The decisions about how we do it are not. There are choices.

And today we make them. Investment in the future rather than the bills of past failure. That is our choice.

We have chosen to spend on the country's most important priorities - the health care of our people, the education of our young, our nation's security and the infrastructure that supports our economic growth.

We have chosen to cut the waste and reform the welfare system that our country can no longer afford. For this is the context of this Spending Review. We have, at £109 billion pounds, the largest structural budget deficit in Europe. This at a time when the whole world is concerned about high deficits, and our economic stability depends on allaying those concerns.

We are paying, at a rate of £120 million a day, £43 billion a year in debt interest. This at a time when we all know that that money would far better serve the needs of own citizens than those of the foreign creditors we borrow from. And we have inherited from the previous Government plans - if you can call them that - that envisaged our national debt ratio still rising in the year 2014.

Not a single penny of savings had been identified. Indeed, they were plans that envisaged the Chancellor of the Exchequer standing here in 2014 and presenting a spending review that still had years of cutting public spending ahead of it. And that is why last year the IMF warned this country thaht it had to accelerate the reduction in the deficit. That is why the OECD, the Governor of the Bank of England and the CBI all agreed with the IMF.

The action we have taken since May has taken Britain out of the financial danger zone: The immediate reductions to in-year spending have bought us a breathing space in the sovereign debt storm.

The creation of an independent Office for Budget Responsibility has brought honesty back to official forecasts. And I can confirm to the House that the OBR, and its new chair Robert Chote, have audited all of the annually managed expenditure savings in today's statements.

The emergency Budget in June was the moment when fiscal credibility was restored.

Our market interest rates fell to near record lows. Our country's credit rating was affirmed. And the IMF went from issuing warnings to calling our Budget "essential". Now we must implement some of the key decisions required by that Budget. To back down now and abandon our plans would be the road to economic ruin.

We will stick to the course. We will secure our country's stability. We will not take Britain back to the brink of bankruptcy.

Mr Speaker, in the Budget I set out the tax increases we were prepared to make, including on capital gains at the higher rate, pensions relief on the largest contributions and, for the first time, a permanent levy on banks.

We also had to increase Value Added Tax, where fortunately we were able to benefit from the preparatory work of the Treasury of the previous Government. But I made it clear that spending reductions rather than tax rises needed to make up the bulk of the consolidation. That is what the leading international evidence suggests works best.

So I set out spending totals for the coming years, and announced some £11 billion of welfare savings that would help achieve them. I also set out a new fiscal mandate for the public finances. To eliminate the structural deficit by balancing the cyclically-adjusted current budget over five years, by 2015-16.

And we set a target of national debt falling as a proportion of national income by that same year. We explained how, for reasons of caution, we will achieve both these objectives a year earlier in 2014-15.

I can confirm that the spending plans I set out today achieve a balanced structural current budget and falling national debt on the same timetable. I can further confirm that the current spending totals I set out in the Budget for each of the next four years are the same as the current spending totals I set out today.

They have not changed. Next year, current expenditure will be £651 billion, then £665 billion the year after, £679 billion the year after that, before reaching £693 billion in 2014-15.

The House will note that current spending is rising not falling over this period. This is partly because, even with the measures we take today, debt interest payments continue to grow in these years. Debt interest payments will reach £63 billion in 2014-15.

It takes time to turn around the debt supertanker. But I can now report to the House that against the plans we inherited, one of the departments which suffers the greatest cut today and at the steepest rate is the Department for Debt Interest.

Debt interest payments will be lower by £1 billion in 2012, then £1.8 billion in 2013 and £3 billion in 2014 - a total of £5 billion over the course of this Spending Review - the equivalent to 16 new hospitals or the annual salaries of 100,000 teachers.

At the Budget I also set out my plans for capital spending over the next four years. I can tell the House that capital spending will be £51 billion next year, then £49 billion, then £46 billion, and £47 billion in 2014-15.

This is about £2 billion a year higher than I set out in the Budget. Given the contractual obligations we inherited from the last Government, doing anything else would have meant cutting projects which would clearly enhance the economic infrastructure of this country. And as this has no direct impact on whether we meet the fiscal mandate or the year in which the debt ratio starts falling. So total public expenditure - capital and current - over the coming years will be £702 billion next year, then £713 billion, £724 billion and £740 billion in 2014-15.

In real terms, public spending will be at the same level as in 2008. Our public services and our welfare system will be put on a sustainable, long term footing. And we will make sure that the financial catastrophe that happened under the previous Government never ever happens again.

Mr Speaker, let me turn now to the spending decisions and the three principles I propose to apply to the choices we have to make. First, reform - that in every area where we make savings, we must leave no stone unturned in our search for waste and we must deliver changes necessary to make our public services fit for the modern age.

Second, fairness - that we are all in this together and all must make a contribution. Fairness means creating a welfare system that helps the vulnerable, supports people into work, and is also affordable for the working families who pay for it from their taxes.

Fairness also means that across the entire deficit reduction plan, those with the broadest shoulders will bear the greatest burden. Those with the most should pay the most, and that includes our banks.

Third, growth - that when money is short we should ruthlessly prioritise those areas of public spending which are most likely to support economic growth, including investments in our transport and green energy infrastructure, our science base and the skills and education of our citizens.

Let me explain now how principles have guided our specific decisions.

First, Mr Speaker, reform. I believe the public sector needs to change to support the aspirations and expectations of today's population, rather than the aspirations and expectations of the 1950s. So the Spending Review is underpinned by a far-reaching programme of public service reform.

We saw over the last decade that more money without reform was a recipe for failure. Less money without reform would be worse. And we are not prepared to accept that. So we have begun by squeezing every last penny we can find out of waste and administration costs.

Our ambition in this review was to find £3 billion of savings from the administrative budgets of central government departments. With the help of the Green Review, and the work done by my Right Honourable Friend the Minister for the Cabinet Office, I can tell the House that we have gone further than we thought possible in cutting back-office costs.

Quangos will be abolished. Services will be integrated. Assets will be sold. And the administrative budgets of every main government department will be cut by a third. The result is this. We promised £3 billion of Whitehall savings, we will deliver £6 billion.

Of course, there is a very understandable concern about the reduction in the total public sector headcount that will result from the measures in the Spending Review. We believe the best estimate remains the one set out by the independent Office for Budget Responsibility.

They have forecast a reduction in headcount of 490,000 over the Spending Review Period. Now let's be clear. That's over four years, and not overnight. Much of it will be achieved through natural turnover, by leaving posts unfilled as they become vacant.

Estimates suggest a turnover rate of over 8% in the public sector. But yes, there will be some redundancies - and that is up to the decisions of individual employers in the public sector - that is unavoidable when the country has run out of money.

We feel responsible for every individual who works for the Government, and we will always do everything we can to help them find alternative work.

In fact, in the last three months alone this economy created 178,000 jobs. So we should remember that unless we deal with this record budget deficit decisively many more jobs will be in danger - in both the private and the public sector.

The Cabinet Office and the Treasury will oversee the programme of Whitehall savings. Both departments will lead by example. The core Cabinet Office budget will be reduced by £55 million by 2014-15.

Additional allocations will be provided to fund electoral reform, support the Big Society project, establish community organisers and launch the pilots for the National Citizen Service - which will give young people for the first time a right of passage to citizenship.

In recognition of the challenges faced by the voluntary and community sector, I am establishing a one year £100 million transition fund to help those facing real hardship.

The Treasury will see its overall budget reduced by 33% - and we will share the department's enormously expensive PFI building, that my predecessor-but-one signed up to, by moving part of the Cabinet Office into the same premises.

The Chancellor is also a Royal Trustee and I want to say something briefly about the Civil List. As I outlined at the Budget, the 10-year settlement expired this year and no provision for a new settlement had been made when we entered office.

Her Majesty graciously agreed to a one year cash freeze in the Civil List for next year. Going forward, she has also agreed that total Royal Household spending will fall by 14% in 2012-13 while grants to the Household will be frozen in cash terms.

In order to support the costs of the historic Diamond Jubilee, which the whole country is looking forward to celebrating, there will be a temporary additional facility of £1 million. After that the Royal Household will receive a new sovereign support grant linked to a portion of the revenue of the Crown Estate, so that my successors do not have to return to the issue as often as I have had to.

Mr Speaker, central to this review is the reshaping our public services. First, there needs to be a dramatic shift in the balance of power from the centre to the locality. A policy of rising burdens, regulations, targets, assessments and guidance has undermined local democracy and stifled innovation.

We will completely reverse this. We will give GPs powers to buy local services, schools the freedom to reward good teachers, and communities the right to elect their police and crime commissioners.

Second, we should understand that all the services paid for by government do not have to be delivered by government. So we will expand the use of personal budgets for special education needs, children with disabilities and long term health conditions.

We will use new payment mechanisms for prisons, probation, and community health services. And we will encourage new providers in adult social care, early years and road management.

For local government, the deficit we have inherited means an unavoidably challenging settlement. There will be overall savings in fundings to councils of 7.1% a year for four years. But to help councils, we propose a massive devolution of financial control.

Today I confirm that ring-fencing of all local government revenue grants will end from April next year. The only exception will be simplified schools grants and a public health grant.

Outside of schools, police and the fire service, the number of separate core grants that go to local authorities will be reduced from over 90 to fewer than 10. Councils and their leaders will remain accountable - but they will no longer have to report on 4,700 local area agreement targets.

The Local Government settlement includes funding for next year's council tax freeze, to help families when their budgets are tight.

We are also introducing Tax Increment Finance powers, allowing councils to fund key projects by borrowing against future increases in locally collected business rates.

Some in local government have concerns about the financing of social care. I can announce that grant funding for social care will be increased by an additional £1 billion by the fourth year of the Spending Review. And a further £1 billion for social care will be provided through the NHS to support joint working with councils - so that elderly people do not continue to fall through between the cracks of two different systems.

That's a total of £2 billion additional funding for social care to protect the most vulnerable.

Mr Speaker, we will also reform our social housing system. For it is currently failing to address the needs of the country. Over 10 years, more than half a million social rented properties were lost. Waiting lists have shot up. Families have been unable to move. And while a generation ago only one in 10 families in social housing had no-one working, this had risen to one in three by 2008-09.

We will ensure that, in future, social housing is more flexible. The terms for existing social tenants and their rent levels will remain unchanged, new tenants will be offered intermediate rents at around 80% of the market rent.

Alongside £4.4 billion of capital resources, this will enable us to build up to 150,000 new affordable homes over the next four years. We will continue to improve the existing housing stock through the Decent Homes programme.

And we will reform the planning system so we put local people in charge, we reduce burdens on builders and encourage more homes to be built, with a New Homes Bonus scheme.

Within an overall resource budget for the Department for Communities and Local Government that is being reduced to £1.1 billion over the period, priority will be given to protecting the Disabled Facilities Grant.

This will go alongside a £6 billion commitment over four years to the Supporting People programme, which provides help with housing costs for thousands of the most vulnerable people in our communities.

And, in recognition of the important service provided by the Fire and Rescue Service, we have decided to limit their budget reductions in return for substantial operational reform.

Mr Speaker, let me turn now to reforms in our security and defence.

Yesterday my Right Honourable Friend the Prime Minister set out the conclusions of the Strategic and Defence Review.

He explained in detail how we will protect the British people, deliver on our international obligations, and secure British influence around the world.

This Spending Review provides the resources to do just that. The budget for the Ministry of Defence will reach £33.5bn in 2014/15. A saving of 8% over this period. On top of this settlement we will continue to provide out of the reserve the resources that our forces in Afghanistan require.

As a Chancellor I believe strongly that if we ask our brave servicemen and women to risk their lives on our behalf in active combat then we will give them all the tools they need to finish the job.

But Mr Speaker our international influence and our commitment to the world are not only determined by our military capabilities. Our diplomacy and development policy matter too. Savings of 24% in the Foreign and Commonwealth Office budget will be achieved over the review period by a sharp reduction in the number of Whitehall based diplomats and back office functions. There will be a focus on helping British companies win exports and secure jobs at home and with the help of UKTI we will track significant overseas investment to our shores.

I can also confirm that this Coalition government will be the first British Government in history and the first major country in the world to honour the United Nations commitment on international aid. The Department for International Development's budget will rise to £11.5bn over the next four years.

Overseas development will reach 0.7% of national income in 2013.

This will halve the number of deaths caused by malaria. It will saved the lives of 50,000 women in pregnancy and 250,000 newborn babies.

Whether working behind the counter of a charity shop or volunteering abroad or contributing taxes to our aid budget, Britons can hold their heads up high and say "even in these difficult times we will honour the promise we made to some of the poorest people in our world".

Our aid budget allows Britain to lead in the world. It may be protected from cuts but not from scrutiny. I have agreed with my Right Honourable Friend the Development Secretary a plan of reform that reduces administration costs to half the global donor average, ends the aid programmes we inherited in China and Russia, focuses on conflict resolution and creates an independent commission to assess the impact of the money we commit.

Mr Speaker, let me now turn to security at home. Protecting the citizen is a primary duty of government. Our police put themselves in harm's way to make the rest of us safe - and we owe them our gratitude. But no public service can be immune from reform.

Her Majesty's Inspector of Constabulary found in his recent report that significant savings could be made to police budgets without affecting the quality of front line policing. And Tom Windsor is leading a review of terms and conditions which will report on how the police service can manage its resources to serve the public even more cost-effectively.

Using independent forecasts for the precept, the settlement I am proposing today will see police spending falling by 4% each year.

By cutting costs and scrapping bureaucracy we are saving hundreds of thousands of police man hours - our aim is to avoid any reduction in the visibility and availability of police in our streets.

Our new National Security Strategy judges terrorism to be one of the highest risks facing this country.

Therefore I am prioritising counter terrorism over the review period, both in the Home Office Budget and the Single Intelligence Account.

We have been assured this will maintain our operational capabilities against both al-Qaeda and its affiliates and against Northern Irish terrorist threats. This will enable us to meet the terrorist threat and protect the Olympic Games in 2012.

Overall, the Home Office budget will find savings of an average of 6% a year. The Ministry of Justice's budget will reach £7 billion by the end of the four year period - with an average saving of 6% a year. A Green Paper will set out proposals to reform sentencing, intervene earlier to give treatment to mentally ill offenders, and use voluntary and private providers to reduce reoffending.

£1.3 billion of capital will also be provided over the period to maintain the existing prison estate and fund essential new-build projects - but plans for a new 1,500-place prison will be deferred.

The Law Officers Department will reduce its budget by a total of 24% over the period, with the Crown Prosecution Service greatly reducing its inflated cost base. Reforms will also be required to streamline the criminal justice system, close under-used courts and reduce the legal aid bill. We do need fair access to justice, but provided at a fair cost for the taxpayer.

Mr Speaker, all the reforms I have spoken of - to Whitehall and the way services are provided, to local government, to our defence and security and justice system - will improve both the value for money for taxpayers and the service provided to the public.

And next month, each government department will publish a business plan setting out its reform plans for the next four years - so their priorities are clear and the public can hold them to account.

Reform is one of the guiding principles of this Spending Review. So too is fairness.

Let's be clear. There is nothing fair about running huge budget deficits, and burdening future generations with the debts we ourselves are not prepared to pay. How ironic that it was the last Labour Prime Minister himself who once observed that the "public finances must be sustainable over the long term. If they are not then it is the poor ... Who will suffer most. (not that he is here in the chamber today.

And that is why we are restoring order to our public finances before that is allowed to happen. A fair government deals with the deficit decisively. And that is what we are going to do. And a fair government makes sure that those with the broadest shoulders bear the greatest burden. The distributional analysis published today shows that those on the highest incomes will contribute more towards this entire fiscal consolidation, not just in cash terms, but also as a proportion of their income and the consumption of public services combined.

Mr Speaker, I completely understand the public's anger that the banks that were so appalling regulated over the last decade, and whose near collapse wrought such damage on the economy, should now be contemplating paying high bonuses.

We are overhauling the system of regulation we inherited so that the Bank of England, with its clout and reputation, is put in charge.

We have set up the Independent Commission on Banking to look at the structure of the industry - and next year we will receive its report.

And today we set out very clearly, for all to take note of, our objective in taxing the banking industry going forward.

We neither want to let banks off making their fair contribution, nor do we want to drive them abroad.

Many hundreds of thousands of jobs across the whole United Kingdom depend on Britain being a competitive place for financial services.

So our aim will be to extract the maximum sustainable tax revenues from financial services.

We will assess what those maximum revenues could be - not just in one year, but over a period of years.

We have already decided - in the face of opposition from the previous government - to introduce a permanent levy on banks.

The legislation will be published tomorrow. Once fully effective, the permanent levy will raise more net each year and every year for the Exchequer than the one-year bonus tax did last year - and I note that the previous Chancellor now admits that it failed to curb behaviour and was not sustainable.

However, that is not enough. We want the banks to pay not just by the letter of the tax law, but by its spirit. And a year ago, the previous government announced in a fanfare that it would require banks to sign up by the Code of Practice on Taxation.

Mr Speaker, I have asked the Revenue how many of our leading 15 banks actually signed up. The answer is four. Four out of fifteen.

That's what happened when they were in office. All talk and no action. So I have instructed the Revenue to work with the banking sector to ensure the remaining banks have implemented the Code of Practice by the end of next month.

We will also address the situation under the last government where the gap between the taxes owed and the taxes paid grew considerably.

So in this Spending Review, while the HMRC budget will be expected to find resource savings of 15% through the better use of new technology, greater efficiency and better IT contracts - we will be spending £900 million more on targeting tax evasion and fraud.

And this additional £900 million is expected to help us collect a missing £7 billion in tax revenues.

Nor will fraud in the welfare system be tolerated anymore. We estimate that £5 billion is being lost this way each year. £5 billion that others have to work long hours to pay in their taxes.

This week we published our plans to step up the fight to catch benefit cheats, and to deploy uncompromising penalties when they are.

That brings me to the wider welfare budget. A civilised country provides for families, protects the most vulnerable, helps those who look for work, and supports those in retirement.

That is why one of the first acts of this Coalition Government was to re-link the basic state pension to earnings, and guarantee a rise each year by earnings, inflation or 2.5%.

Never again will those who worked hard all their lives be insulted with a state pension increase of just 75 pence. But this guarantee, Mr Speaker, of a decent income in retirement has to be paid for at a time when people are living much longer than anyone predicted.

We should celebrate that fact, but also confront it.

Lord Turner's Report on pensions, commissioned by the last government, acknowledged that a more generous state pension had to be funded by an increase in the pension age.

Even since its publication, life expectancy has risen further than it predicted. Before the summer, we launched a review on increasing the state pension age, and that has now concluded.

As a result, I can today announce that the state pension age for men and women will reach 66 by the year 2020.

This will involve a gradual increase in the State Pension Age from 65 to 66, starting in 2018. And it will mean an acceleration of the increase in the female pension age already underway since this April.

From 2016 the rate of increase will be three months in every four rather than the current plan of one month in every two. Raising the State Pension Age is what many countries are now doing, and will by the end of the next Parliament save over £5 billion a year - money which will be used to provide a more generous basic state pension as we manage demographic pressures.

Earlier this month, we also received the interim report from John Hutton's Public Service Pension Commission.

I am sure the whole House will want to thank John for this excellent and independent piece of work.

Mr Speaker, I welcome his findings - and I hope it will form the basis of a new deal, that balances the legitimate expectations of hard working public servants for a decent income in retirement with the equally legitimate demands of hard-working taxpayers that they do not pay unfairly for it.

And I think the the elements of this new pension deal are clear. We should accept that public service pensions continue to provide a form of defined benefit, and that there is no race to the bottom of pension provision.

We want public service pensions to be a gold standard. At the same time, we should accept that they must be affordable.

When these public service pension schemes were established in the 1950s, taxpayers made half the contributions. Today they make up two-thirds of contributions, and the unfunded bill is set to rise to £33 billion by 2015-16.

So I think we should accept, as John Hutton does, that there has to be an increase in employee contributions, although I also agree with John that this should be staggered and progressive.

That means the lower paid - and those in the armed forces - are protected and the highest paid public servants, who get the largest benefits, pay the highest contributions.

We will await the full Commission Report next spring before coming to any conclusions on the exact nature of the defined benefit and progressive contribution rise. We will also launch a consultation on the Fair Deal policy as he recommends.

But we will carry out, as the interim report suggests, a full public consultation now on the appropriate discount rate used to set contributions to these pensions. From the perspective of filling the hole in the public finances, we will seek changes that deliver an additional £1.8 billion of savings per year in the cost of public service pensions by 2014-15 - over and above the plans left to us by the last government.

It is also clear that the current final-salary pension terms for MPs are not sustainable and we anticipate that the current scheme will have to end.

We will make a further statement following the publication of Lord Hutton's findings.

The welfare system is also there to help people of a working age when they lose their job, have a disability, start a family and need help with low pay. But the truth - as everyone knows - is that the welfare system is failing many millions of our fellow citizens.

People find themselves trapped in an incomprehensible out-of-work benefit system for their entire lifetimes, because it simply does not pay to work.

This robs them of their aspirations and opportunities. And it costs the rest of the country a fortune.

Welfare spending now accounts for one third of all public spending. Benefit bills have soared by 45% under the previous government.

In some cases, the benefit bill of a single out-of-work family has amounted to the tax bills of 16 working families put together.

This is totally unsustainable and unfair. The last government promised reform and flunked it. We will deliver.

My Right Honourable Friend, the Work and Pensions Secretary is setting out proposals, with my support, to replace all working age benefits and tax credits with a single, simple Universal Credit. The guiding rule will be this: it will always pay to work.

Those who get work will be better off than those who don't. It represents the greatest reform to our welfare state for a generation.

It will be introduced over the next two Parliaments, at a pace that ensures that we get this right. I have set aside more than £2 billion over this Spending Review of resources to make this happen.

And it will go alongside our new Work Programme, which we are also funding today.

Drawing on the skills of the voluntary sector and private providers, the Work Programme will provide intensive help to those looking for work - and support for those who could look for work, but currently lack the confidence or skills to try.

The Department for Work and Pensions will make savings to help deliver these schemes, by increasing the use of digital applications and reducing overheads.

But we will also be seeking substantial savings from the rest of the £200 billion benefit bill, on top of those already identified in the Budget.

As I said in June, the more we could save on welfare costs - the more we could continue other, more productive areas of government spending.

And in the massive public consultation we conducted over the summer, the overwhelming message we received was that the British people think it is fair to reform welfare bills and reduce them in order to protect important public services.

So today I announce these further welfare savings. We will time limit contributory Employment and Support Allowance for those in the Work Related Activity Group to one year.

This is double the length of time than for contributory Jobseeker's Allowance.

We will increase the age threshold for the shared room rate in housing benefit from 25 to 35, so that housing benefit rules reflect the housing expectations of people of a similar age not on benefits.

We will give local authorities greater flexibility to manage Council Tax together with direct control over Council Tax benefit, within an overall budget that will be reduced by 10% from April 2013.

We will align the rules for the mobility and care elements of Disability Living Allowance paid to people in residential care, generating savings, but enabling us to continue with this important benefit.

We will freeze the maximum Savings Credit award in Pension Credit for four years, thereby limiting the spread of means-testing up the income distribution.

On tax credits:

We will further control the cost of tax credits by freezing the basic and 30 hour elements for three years;

We will change the Working Tax Credit eligibility rules so that couples with children must work 24 hours per week between them;

And we will return the childcare element of the Working Tax Credit to its previous 70% level.

We will also introduce a new cap on benefits.

No family that doesn't work will receive more in benefits than the average family that does go out to work. That is tough, but fair.

Of course, those in receipt of Disability Living Allowance, Working Tax Credit or the War Widows Pension will be excluded.

Taken together, all these welfare measures I have outlined will save the country £7 billion a year.

But Mr Speaker, we want to ensure that low income families with children are protected from the adverse effects from these essential savings. Because this Government is committed to ending child poverty.

I can announce today that I am increasing the child element of the Child Tax Credit by a further £30 in 2011-12 and £50 in 2012-13 above indexation. This will mean annual increases of £180 and then £110 above the level promised by the last government.

This will provide support to four million lower income families - and I can confirm that using the same model we inherited, the Spending Review has no measurable impact on child poverty over the next two years. While we await the conclusions from the report by the Right Honourable Member for Birkenhead. Let me turn now to the universal benefits.

Mr Speaker, I have taken the difficult decision to remove child benefit from families with a higher rate taxpayer.

I wish it were otherwise - but I simply cannot ask those watching this earning just £15,000 or £30,000 a year to go on paying the child benefit of those earning £50,000 or £100,000 a year.

The debts of the last Labour Government, and the need to make sure the better off in society also make a fair contribution, make this choice unavoidable.

And it also means that no further changes to child benefit are required.

Child benefit will continue to be paid in the normal way to the great majority of the population, from birth until a child leaves full time education at the age of 18 or even 19.

We can afford to do this because, according to the latest independent estimates we have received from the Office for Budget Responsibility, removing child benefit from higher rate taxpayers actually saves Britain £2.5 billion a year.

We also keep the universal benefits for pensioners, in recognition of the fact many have worked hard and saved hard all their lives.

Free eye tests; free prescription charges; free bus passes; free TV licenses for the over 75s; and Winter Fuel Payments will remain exactly as budgeted for by the previous Government - as promised.

I am also turning the temporary increase in the Cold Weather Payments introduced by the last government into a permanent increase.

In my view, higher Cold Weather Payments should be for life, not just for general elections.

And so too are the promises we make on the National Health Service.

The NHS is an intrinsic part of the fabric of our country. It is the embodiment of a fair society.

This Coalition Government made a commitment to protect the NHS, and increase health spending every year.

Today we honour that commitment in full. Total health spending will rise each year over and above inflation.

This year we are spending £104 billion on health care, capital and current combined.

By the end of four years, we will be spending £114 billion. We can afford this in part because of the decisions on welfare I have just announced.

And also because we have made tough decisions in other parts of the government budget. But to govern is to choose. And we have chosen the National Health Service.

That does not mean we are letting the Health department off the need to drive forward real reform and savings from waste and inefficiency. Productivity in the Health Service fell steadily over the last 10 years, and that must not continue.

By 2014, we are aiming to save up to £20 billion a year by demanding better value for money. But the money we save will be reinvested in our nation's health care.

As the independent forecasts we published in the Budget show, we need to make these savings to deal with our ageing population and the rising costs of new medical treatments.

But there are also new services we can offer. A new cancer drug fund will be provided. Spending on health research will be protected and we will prioritise work on treatment for dementia.

We will expand access to psychological therapies for the young, elderly and those with mental illness. We will fund new hospital schemes, including the St Helier, the Royal Oldham and the West Cumberland.

For health spending, as for other spending announcements, there will be consequential allocations for Scotland, Wales and Northern Ireland.

The Barnett formula will be applied in the usual way. And that means that the increase in health spending and the relative protection of education spending will feed through to the devolved resource budgets.

It means that all three nations will actually see cash rises in their budget, although rises below the rate of inflation. For Scotland, the resource budget will rise to £25.4 billion in 2014-15. For Wales, it will rise to £13.5 billion. And for Northern Ireland, it will rise to £9.5 billion.

In Scotland, we are proceeding with the implementation of the Calman reforms.

In Wales, we will consider with the Assembly Government the proposals in the final Holtham report, consistent with the Calman work being taken forward in Scotland. In Northern Ireland, the collapse of the Presbyterian Mutual Society has caused great hardship. And people have been left without their money for too long.

I confirm today that we will provide the Northern Ireland Executive with £25 million in cash, and a £175 million loan, to help those who have lost their life savings.

We will also help those across the United Kingdom who have lost money as a result of the collapse of Equitable Life. For 10 years the Equitable Life policyholders have fought for justice.

For 10 years the last government dithered and delayed and denied them that justice.

It is time to right the wrong to many many thousands of people, who did the right thing, who saved for their future, tried not to depend on the state - and then were innocent victims of a terrible failure of regulation.

So let me make it clear. I accept the findings of the Parliamentary Ombudsman in full.

I have read the advice of Sir John Chadwick, and I thank him for it, but I do not agree with the level of compensation his analysis suggested.

I agree with the Ombudsman that the relative loss suffered is the difference between what policyholders actually received from their policies, and what they would have received elsewhere.

The Parliamentary Ombudsman herself recognised that a balance had to be struck between being fair to policyholders and fair to taxpayers, particularly when many budgets and benefits are being cut. But money we pay out has to come from general public expenditure.

I have decided that the fair amount to pay out in total is in the region of £1.5 billion, two thirds of which will be found in this Spending Review period.

Those who had With Profits Annuities are particularly hard hit, as they were retired and were unable to move their savings elsewhere. As a result, the Government will cover the cost of the total relative loss suffered by these deserving people. The scheme will start making payments next year.

Mr Speaker, these measures and our welfare reforms means that it will always pay to work; the benefit savings will help us protect key public services like the National Health Service; that there is help for those who have saved and lost everything.

These are fair decisions, consistent with the second principle of this Spending Review.

Mr Speaker, the third and final principle centres on growth and promoting a private sector recovery.

By restoring macroeconomic stability we have brought certainty to businesses. By cutting business taxes we are giving business the freedom to compete.

And today's review builds on these steps - because even when money is short we should prioritise those areas of public spending which are most likely to support economic growth.

That is what we are doing in the Department for Business, Innovation and Skills.

Administration will be cut by £400 million. 24 quangos will go.

Lower-priority programmes like Train to Gain will be abolished. Adult learners and employers will have to contribute more to further education.

This means that today I can announce the largest ever financial investment in adult apprenticeships. An increase of over 50% on the previous government, helping 75,000 new apprentices a year by the end of the Spending Review period.

We will maintain and invest in the Post Office Network, and protect community post offices. We will come forward with our detailed response to Lord Browne's report on higher education funding and student finance, including our plans to provide financial support to encourage those from the poorest households to stay in education.

Our universities are the jewels in our economic crown, and it is clear that, if we want to keep our place near the top of the world league tables, then we need to reform our system of funding and reject - as, to be fair, many opposite do - the unworkable idea of a pure graduate tax.

Clearly better-off graduates will have to pay more - and this will enable us to reduce considerably the contribution that general taxpayers have to make to the education of those who will probably end up earning much more than them.

Overall, average annual savings of 7.1% will be found from the Department for Business's budget - the minimum it was asked to find. Within those savings, however, the Secretary of State and I have decided to protect the science budget.

Britain is a world leader in scientific research. And that is vital to our future economic success. That is why I am proposing that we do not cut the cash going to the science budget. It will be protected at £4.6 billion a year.

Building on the Wakeham Review of science spending, we have found that within the science budget significant savings of £324 million can be found through efficiency.

If these are implemented, then with this relatively protected settlement I am confident that our country's scientific output can increase over the next four years. We will also: invest £220 million in the UK centre for Medical Research and Innovation at St Pancras; fund the molecular biology lab in Cambridge; the Animal Health Institute in Pirbright; and the Diamond synchrotron in Oxford.

Research and technological innovation will also help us with one of the greatest scientific challenges of our times - climate change - and it will support new jobs in low-carbon industries.

So today, even in these straightened times, we commit public capital funding of up to £1 billion to one of the world's first commercial scale carbon capture and storage demonstration projects.

We will also invest over £200 million in the development of off-shore wind technology and manufacturing at port sites.

Yesterday, protestors scaled the Treasury urging us to proceed with our idea for a Green Investment Bank.

Mr Speaker, it's the first time anyone has protested in favour of a bank. We will go ahead. I have set aside in this Spending Review £1 billion of funding for that Bank, but I hope much more will be raised from the private sector and the proceeds of future government asset sales.

The aim of all these investments is for Britain to be a leader of the new green economy. Creating jobs, saving energy costs, reducing carbon emissions.

We will also introduce incentives to help families reduce their bills. We will introduce a funded Renewable Heat Incentive.

Our Green Deal will encourage home energy efficiency at no upfront cost to homeowners and allow us to phase out the Warm Front programme.

Overall, the total resource settlement for the Department for Energy and Climate Change will fall by an average 5% a year - but there will be a large increase in capital spending, partly to meet unavoidable commitments we've been left on nuclear decommissioning.

DEFRA will deliver resource savings of an average 8% a year - but we will fund a major improvement in our flood defences and coastal erosion management that will provide better protection for 145,000 homes.

Mr Speaker, Britain's arts, heritage and sport all have enormous value in their own right. But our rich and varied cultural life is also one of our country's greatest economic assets. The resource budget for the Department of Culture, Media and Sport will come down to £1.1 billion by 2014-15.

Administrative costs are being reduced by 41%. 19 quangos will be abolished or reformed. All of this is being done so we can limit four year reductions to 15% in core programmes like our national museums, the frontline funding provided to our arts and Sport England's Whole Sport plans.

We will complete the new world-class building extensions for the Tate Gallery and British Museum in London.

And the Secretary of State will provide details of further projects shortly. I can also announce today that in order that our nation's culture and heritage remains available to all, we will continue to fund free entry to museums and galleries.

There is ongoing provision of the £9.3 billion of public funding for a safe and successful Olympic and Paralympic Games in London in 2012.

And we have also approached the BBC to ensure that they too make their contributions, as a publicly funded organisation, to savings during this Spending Review.

I am pleased to confirm that this week we have struck a deal. The BBC will take from the government the responsibility for funding the BBC World Service and BBC Monitor, as well as part-funding S4C. This amounts to some £340 million of savings a year for the Exchequer by 2014-15.

To ensure that the cost of these new obligations is not passed on to the license fee payer, the BBC has agreed a funding deal for the full duration of its Charter Review.

The licence fee will be frozen for the next six years. This deal helps almost every family and is equivalent to a 16% saving in the BBC budget over the period, similar to the savings in other major cultural institutions.

The BBC has also agreed to reduce its on-line spend and make no further encroachments into local media markets, to protect local newspapers and independent local radio and TV.

And they will contribute to the £530 million we will spend over the next four years to bring super-fast broadband to rural parts of our country that the private sector will take longer to reach.

Pilots will go ahead in the Highlands and Islands, North Yorkshire, Cumbria and Herefordshire.

All of this will help encourage the growth of our creative industries as a key part of the new economy we are seeking to build. Mr Speaker, after our defence requirements are met, the Department for Transport will receive the largest capital settlement.

Over the next four years we will invest over £30 billion in transport projects, more than was invested during the past four years.

£14 billion of that will fund maintenance and investment on our railways. Direct bus subsidies will be reduced, but statutory concessionary fares will remain.

The cap on regulated rail fares will rise to RPI +3% for the three years from 2012, but that will help this country afford new rolling stock as well and improve passenger conditions.

The Secretary of State will set out how more of the transport money will be allocated next week. But I want to tell the House today about some of the projects that will go ahead.

For let's remember that even after these tough spending settlements the country is still going to be spending over £700 billion a year.

So in Yorkshire and Humber, capacity on the M62 will be expanded, £90 million will be spent to improve rail platforms across various towns and cities and we will also improve line speeds across the Pennines.

In the North East, £500 million will be spent refurbishing the Tyne & Wear Metro and Tees Valley bus network.

In the North West, we will invest in rail electrification between Manchester, Liverpool, Preston and Blackpool and we will provide funding for a new suspension bridge over the Mersey at Runcorn.

Rail and roads are devolved to the Scottish executive, as are roads in Wales - but I can tell the House that major rail investments around Cardiff, Barry and Newport will go ahead.

In the East Midlands the M1 and A46 will be improved.

In the West Midlands, we will extend the Midland Metro and completely redevelop Birmingham New Street station.

In the South West, we will fund improvements on the M5 and M4, and the new transport scheme for Weymouth.

In the East of England, colleagues will be delighted to know that the A11 to Norwich will be upgraded.

Around London, we will widen the M25 between ten different junctions and complete the improvement to the A3 at Hindhead.

And in London, on top of the Olympics, a major investment in our capital city's transport infrastructure will take place.

Crossrail will go ahead and key Tube lines will be upgraded for the 21st century. This is nothing like the complete list because next week we will be setting out more details.

So yes, we are saving money and putting the state on a more sustainable footing, but even then we will still be spending tens of billions of pounds on Britain's future infrastructure.

Next week the Secretary of State will also set out our national infrastructure plan - so that private money is also put to work in building for this country the economic infrastructure our businesses need.

Our regional growth fund will also help us do that. As promised, a billion pounds has been found for the fund over the next two years. Money designed to lever in private investment in areas of our country where it has been too absent over the last decade.

And I can announce today that I am providing close to half a billion pounds extra in the third year for the regional growth fund.

Long term investment in the capacity of our transport, our science, our green energy will all help move Britain from its decade long dependence on one sector of the economy in one part of the country - and the ruin that has led to.

But Mr Speaker, the most important ingredient a 21st century economy needs is well educated children, who believe in themselves and aspire to a better life whatever their background or disadvantages.

In June, after the Budget, when the Chief Secretary and I turned our attention to how to allocate spending between government departments, we set ourselves a goal.

We wanted to see if it was possible - even when spending was being cut - to find more resources for our schools and for the early years education of our children. I can tell the House that we have succeeded. It has meant other departments taking bigger cuts. But I believe strongly that this is the right choice for our country's future.

There will be a real increase in the money for schools, not just next year or the year after - as the last government once promised - but for each of the next four years.

The schools budget will rise from £35 billion to £39 billion. Even as pupil numbers greatly increase, we will ensure that the cash funding per pupil does not fall.

We will also sweep away all the different ways in which money is ring-fenced so that schools can decide how to spend their money as they see best.

We will also introduce a new £2.5 billion pupil premium that supports the education of disadvantaged children, and which will provide a real incentive to good schools to take pupils from poorer backgrounds.

This pupil premium is at the heart of the Coalition Agreement and it is at the heart of our commitment to reform, fairness and economic growth.

Parents, teachers and community groups will be supported if they wish to establish free schools.

We will fund an increase in places for 16 to 19 year olds, and raise the participation age to 18 by the end of the Parliament - and that enables us to replace education maintenance allowances with more targeted support.

And we will also provide support for the early years of our children. The increased entitlement to 15 hours a week free education for all three and four year olds - introduced under this government - will continue. Sure Start services will be protected in cash terms, and the programme will be focused on its original purpose. And we will help them further by introducing, for the very first time, 15 free hours of early education and care for all disadvantaged two year olds.

So that these children have a chance in life and are ready, like the rest of their class mates, for schools.

Overall, the Department for Education will be required to find resource savings of only 1% a year. Central administration will be cut by a third and five quangos will go.

The capital budget will have to bear its share of the reductions. But as the House will know we've had to phase out the hopelessly inefficient and overcommitted Building Schools for the Future programme.

But £15.8 billion will be spent to maintain the school estate and rebuild and refurbish 600 schools.

I repeat - the resource money for schools, the money that goes into the classroom - on the broadest definition, including all the main grants, will go up in real terms every year.

It is a real investment in the future of our children and in the future growth of our economy too.

Mr Speaker. Let me conclude.

The decisions we have taken today bring sanity to our public finances and stability to our economy.

They deal decisively with the largest budget deficit this House of Commons has ever had to face outside of a wartime.

We have had to make choices. Choices about the things we support. And today, I have announced real increases in the NHS budget and the resources of schools, as well as new investments in the economic infrastructure of our economy.

And I have announced real reductions in waste and reforms to welfare. And through this we will reshape public services to meet the challenges of our times.

Mr Speaker, during the process of this Spending Review I have received many submissions including one from the party opposite that the average cut for unprotected departments should be set at 20% over the coming four years rather than the 25% that I anticipated in my June Budget.

I have examined this proposal carefully and I have consulted the published documents of my predecessor the Right Honourable Member for Edinburgh South West.

And because of our tough but fair decisions to reform welfare, and the savings we've made on debt interest I am pleased to tell the House it has been possible - and the average saving in departmental budgets will be lower than the previous Government implied in its March Budget.

Instead of cuts of 20% there will be cuts of 19% over the four years. So I thank them for their support and input and I look forward to their votes.

Mr Speaker, this Coalition Government faced the worst economic inheritance in modern history.

The debts we were left threatened every job and public service in the country. But we have put the national interest first. We made the tough choices. We protected health and schools and investment in growth.

We've reformed welfare and cut waste. We made sure that we are all in this together. And we've taken our country back from the brink of bankruptcy.

A stronger Britain starts here. And I commend this statement to the House.