George Osborne has set out his spending plans for beyond the next election as he draws the battle lines before the country goes to the polls in 2015.
The Chancellor outlined how he will slice £11.5bn from Whitehall department budgets, extending the age of austerity into the next parliament.
In his last spending review in 2010, Mr Osborne set out plans to eliminate the deficit by 2015 - allowing the cuts to end in time for the election.
But sluggish economic growth and a rising deficit have forced him to impose further drastic savings for 2015/16.
Mr Osborne said his actions had "taken our economy back from the brink of bankruptcy" and declared Britain was emerging from "intensive care".
George Osborne and Danny Alexander leaving the Treasury on Wednesday But he said "challenges from abroad" such as the eurozone crisis meant the country has to continue to make savings.
He conceded that the spending review involved "difficult decisions" but added: "There never was an easy way to bring spending under control."
Ministers face cuts of 8% on average, although health, schools and overseas aid are still ringfenced - forcing deeper reductions in other areas.
The Treasury, Cabinet Office, Ministry of Justice, Department of Environment and Department of Communities and Local Government have all agreed to extra savings of 10%.
Business loses out by 6%, the Foreign Office by 8% and the Home Office by 6% and Scotland, Wales and Northern Ireland offices face 2% cuts.
The public sector faces a further squeeze, with pay rises limited to up to 1% on average for 2015/16 and automatic pay progression scrapped for all but those in the armed forces.
The move will provoke fury from public sector trade unions, who claim their members are already paying the price of austerity.
But the Chancellor said: "Keeping pay awards down and ending automatic progression pay means that, for every pound we have to save in central administration, we can better limit job losses."
According to the Office for Budget Responsibility, another 144,000 people working for the Government will also lose their jobs by 2015/16.
Thousands of ex-pat pensioners face losing their winter fuel payments and further details were announced about the planned cap on welfare spending.
Mr Osborne said housing benefit, tax credits, disability benefits and pensioner benefits apart from the basic state pension will be subject to the limit.
Labour has suggested it could include pensions in any cap and experts have warned if the handout is not, any limit will be "meaningless".
The Chancellor vowed that the defence resource budget will stay at £24bn in cash terms and the equipment budget will be £14bn, rising by 1% in the coming years.
He confirmed there would be no further cuts to troop numbers but said the civilian workforce would be slashed.
There was some positive news as billions more was pledged for key infrastructure projects over the next five years, further details of which will come on Thursday.
More than £3bn in capital investment will go on affordable housing, Mr Osborne said.
He also promised the largest programme of investment in roads for 50 years and in railways since the Victorian age.
And counter-terrorism is being given a rare cash boost, with MI5, MI6 and GCHQ seeing a 3.4% rise in its budget worth £15bn over five years.
The Commons statement is highly political, coming less than two years before the next election and outlining plans for a time he hopes the Tories will be in power alone.
Mr Osborne said: "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."
Labour claims the Government will go into 2015 with state debt at £96bn and has pushed borrowing up by £245bn more than planned at the last spending review.
However leader Ed Miliband has said he cannot promise to reverse any of the cuts in day-to-day spending announced by Mr Osborne if he wins the next election.
Ahead of the statement, Sky's City Editor Mark Kleinman revealed that the Government's main body for encouraging inward investment and promoting British companies abroad, UKTI, faced an 8% cut to its budget.
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