George Osborne to offset further spending cuts with capital investment

George Osborne agreed the final details of spending cuts worth £11.5bn for 2015-16 on Sunday, ahead of an announcement this week that will also see the Treasury unveiling a multi-billion, six-year infrastructure investment programme.

Vince Cable, the business secretary, was the last cabinet minister involved in the spending review to settle, although defence, education, local government, health and international aid also kept negotiations with the Treasury going until very recently.

At one stage Osborne said that ministers who refused to cut their budgets for would be summoned before the "star chamber" for a grilling on why they could not find savings. In the event the "star chamber" was never convened for this purpose, although Treasury sources insisted that the threat of a summons did help to concentrate minds.

Osborne will announce details of the 2015-16 spending review cuts in a statement to the Commons on Wednesday.

In a move which suggests that the chancellor wants to prevent Labour being seen as the party most committed to capital spending, the Treasury will this week combine the spending review with the announcement of a series of infrastructure investment projects running from 2015-16 to 2020-21.

Given that the total sum allocated in the budget for capital spending in 2015-16 alone is £50bn, the headline sums involved could be huge. Danny Alexander, the chief secretary to the Treasury, will announce the details in the Commons on Thursday.

The infrastructure investment programme will be funded from within the Treasury's long-term spending envelope and it will include spending on road, rail and high-speed internet. The projects are expected to include upgrading the A14, a new Mersey Gateway bridge in the north-west and the first tranche of work on the HS2 high-speed railway.

Alexander agreed the final details of the spending review with his Lib Dem colleague Cable on Sunday morning. At around the same time, Osborne and his Labour opposite number, Ed Balls, were both raising the prospect of further spending cuts after 2015-16 in interviews on the Andrew Marr show.

Osborne told the programme that on Saturday he reached a settlement with the Ministry of Defence that would protect frontline service personnel but lead to the loss of civilian jobs. Several hundred posts are expected to go, with the rest of the estimated £1.5bn savings achieved through cuts to civilian allowances, efficiency measures and contracts with suppliers being renegotiated.

"There will not be a reduction in our military capability," Osborne said. "We're not going to reduce the number of soldiers, sailors, airmen, and in fact we're actually going to be able to spend some money on things like cyber [security], which is the new frontier in defence."

The Labour party has already announced that it will accept the coalition's overall day-to-day spending plans for 2015-16, although it reserves the right to change how current spending is allocated, and to increase capital spending. But yesterday Balls went further, saying he expected to make cuts beyond 2015-16.

"Do I think after 2015-16, the next Labour government will be making very difficult decisions which will involve some cuts? Yes," the shadow chancellor said.

Some in Labour are strongly opposed to this. In a letter in today's Guardian, Peter Hain, the former cabinet minister, Neal Lawson, chair of the pressure group Compass, and other signatories say that continuing austerity measures beyond the next election would be "politically and economically disastrous".

Balls has already announced that Labour would cut winter fuel payments for wealthy pensioners after the general election, saving £100m a year. The government is committed to keeping winter fuel payments for all pensioners until 2015 and until now, senior Conservatives have said very little about whether or not they would renew that pledge.

But Osborne suggested that a rethink was now under way, stressing that benefits for pensioners had to be "sustainable".

"On pensioner benefits, including the winter fuel allowance, we made a very clear promise about this parliament, and we believe in keeping our promises to the British people," Osborne said.