George Osborne will warn there are no "miracle cures" for the UK's problems today as he admits more drastic action is needed to balance the Government's books.
In a bleak mini-budget, the Chancellor is to confirm that Whitehall departments are being ordered to find further cuts to fund £5 billion of "shovel ready" projects designed to kick-start the economy.
He is also widely expected to concede that sluggish growth means it will take longer to tackle the deficit and a key coalition target to have public sector debt falling by 2015-16 may be missed.
The political and economic high-wire act was made even trickier last night when the statistics watchdog rejected ministers' claims that health service spending has been rising in real terms. David Cameron pledged at the general election to "cut the deficit not the NHS".
Delivering his crucial Autumn Statement this afternoon, Mr Osborne will argue that he is "confronting the country's problems, instead of ducking them".
"The public know that there are no miracle cures. Just the hard work of dealing with our deficit and ensuring Britain wins the global race," he will say.
Mr Osborne and Chief Secretary Danny Alexander briefed the Cabinet yesterday on the plans for £5 billion of capital projects over the next two years, which the Prime Minister said would "make a difference in our country and in our economy".
It will include £1 billion to build or expand up to 100 new academies and free schools over the next two years, with the cash directed at areas experiencing a shortage in classroom places.
Treasury sources said the cuts in departmental spending amounted to less than the £3 billion total underspend by departments over the past two years. The rest of the money is due to be found from existing budgets.
But Labour said the announcement amounted to an admission that the reduction in infrastructure spending since 2010 had been "a catastrophic mistake" and weakened the economy.
Concerns were also raised over the impact on services like the police and social care of cuts to current spending amounting to 1% (£950 million) in 2013/14 and 2% (£2.5 billion) in 2014/15.
The chairman of the Police Federation of England and Wales, Paul McKeever, said forces were already having to cope with "crippling" 20% budget cuts before today's "flabbergasting" announcement.
Meanwhile TUC general secretary Brendan Barber said the cuts would "put our stretched public services under even greater strain", while the £5 billion additional investment was "nowhere near enough to undo the damage caused by £22 billion of infrastructure cuts of the last two years".
Health, schools, international aid, HM Revenue and Customs and nuclear decommissioning will be protected from the latest round of cuts, while local government will be exempted for the first year and the Ministry of Defence will be given flexibility to carry over savings from previous years. The changes apply directly only to England, but will have a knock-on impact on devolved administrations.
The decision to inflict further cuts on Whitehall budgets comes after a mid-term spending assessment carried out by Mr Alexander, which found that departments had exceeded their savings targets.
Speaking on a visit to a south London school with his Liberal Democrat deputy Nick Clegg, Mr Cameron said: "Government departments aren't actually spending up to their budgets. So I think we can say to them, 'You've got to cut back some spending, including some unnecessary spending', and let's put that money into things that will make a difference in our country and in our economy - more roads, more school buildings, more infrastructure to make our economy work better, to make our country work better."
Mr Osborne will also use today's statement to signal his approval for up to 30 new gas-powered electricity power stations, as well as floating possible tax breaks and regulatory reforms to encourage investment in innovative "fracking" technologies for extracting gas from shale deposits.
Friends of the Earth denounced the policy as a "reckless dash for gas" and the GMB union said it was "madness" to burn more gas to produce electricity when wholesale prices were increasing.
But the Institute of Directors said gas will be needed until renewable energy sources become more reliable and affordable.
UK Statistics Authority chairman Andrew Dilnot rebuked ministers last night for repeatedly claiming that NHS spending has been rising in real terms.
Upholding a complaint by Labour, the watchdog said the best-available Treasury data suggested that health spending had been lower in 2011/12 than in 2009/10, once inflation was taken into account.
At best, he concluded, because of the small size of the changes and uncertainties surrounding them, it might be fair to say spending had "changed very little".
Osborne goes for growth (by firing 10,000 civil servants)
By Andrew Grice
More than 13,000 civil service jobs could be axed as a result of an extra £5bn of spending cuts to be announced by George Osborne in his autumn statement.
The Chancellor told cabinet ministers that his squeeze on their departmental budgets would be tightened so he can switch money from day-to-day spending to building projects to help secure economic growth. They include up to 100 new free schools and academies, providing an extra 50,000 places where they are most needed at a cost of £1bn; science, skills and transport projects.
Most departments will have to shave 1 per cent off their running costs in 2013-14 and save 2 per cent the following year, saving £3.4bn on top of existing cuts. The rest of the “go-for-growth” funds will come from underspent Whitehall budgets. Funds for health, schools, overseas aid, nuclear decommissioning and HM Revenue & Customs will be protected and the Ministry of Defence will be allowed to carry forward spending from one financial year to the next.
Treasury sources said frontline services would be safeguarded and most of the savings would come from administration, but admitted that some jobs would be lost. They said the “gold standard” was the Department for Education, where Michael Gove’s “zero-based” review is expected to cut 1,000 civil service jobs, a quarter of the total.
The Public and Commercial Services Union predicted last night that the new cuts would mean almost 13,500 civil service jobs being lost, in addition to the 50,000 due to be axed over the next two years and the 63,000 already cut since 2010.
Ministers argue that the building projects will create jobs as well as growth. The independent Office for Budget Responsibility will today update its March forecast that the 730,000 public sector job losses between 2011-17 will be outweighed by the creation of 1.7 million jobs in the private sector.
Work and Pensions will be among the non-exempt departments facing pressure for job cuts. Mr Osborne will also announce more savings on the benefits bill, with payments like jobseekers allowance likely to rise by less than inflation next April. In return for accepting that, the Liberal Democrats are likely to win a squeeze on the rich, through a cut in the maximum £50,000 a year of pension contributions that attract tax relief.
The Chancellor faces the embarrassment of seeing the OBR downgrade its growth forecasts and having to admit he may miss his key fiscal target to see total government debt falling as a share of GDP by 2015-16. He will trumpet the £5bn switch as a sign that, with the eurozone struggling, the Government is doing everything it can to secure growth without departing from its deficit-reduction strategy. He will argue that average annual spending on building projects will be slightly higher under the Coalition than the previous Labour Government.
A Treasury spokesman said: “We are committed to solving today’s problems, but also preparing for tomorrow’s challenges by investing in our future and equipping Britain for the global race.”
Labour dismissed the £5bn spending boost, claiming that none of the road building projects announced a year ago had started yet.
Rachel Reeves, the shadow Chief Treasury Secretary, said: “The Chancellor seems to have finally admitted that abolishing the Building Schools for the Future programme and his other deep cuts to infrastructure investment were a catastrophic mistake which cost jobs and weakened our economy. But this extra funding for new free schools will be smaller than the huge cuts he made two years ago to school and college buildings. George Osborne must explain which frontline services he will cut further to pay for this.”