Chancellor George Osborne on the "hard road to a better future"

Chancellor George Osborne is to slash welfare benefits by a further £7bn as he sets out the biggest spending cuts since the Second World War.

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.

Unveiling his Spending Review in the Commons, which includes £81bn in spending cuts, he told MPs: "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt."

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

Universal benefits for pensioners will be retained exactly 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 state pension age for men and women to 66 by the year 2020, will be brought forward, with a gradual increase in the State Pension Age from 65 to 66, starting in 2018.

Up to 500,000 public sector jobs could go by 2014-15, according to the Office for Budgetary Responsibility.
Bank levy

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.

He has set out extensive cuts to individual government departments - including:

    * Home Office - 6% cuts, with police spending down by 4% each year of the spending settlement

    * Foreign Office - 24% cut through reduction in the number of Whitehall-based diplomats and back office costs

    * HM Revenue and Customs - 15% through the better use of new technology and greater efficiency

The Department for International Development's budget will rise to £11.5bn over the next four years, reaching 0.7% of national income in 2013.

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

Plans for a 1,500 place new prison have been dropped, he said.

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

There will be overall savings in funding to local councils of 7.1%, but ring-fencing of all local government revenue grants will end from April next year, except for simplified schools grants and a public health grant.

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.