Chancellor George Osborne will use the Budget to impose a further £2.5 billion of cuts on Whitehall, with the proceeds to be invested in capital projects designed to kick-start growth.
Mr Osborne and Treasury Chief Secretary Danny Alexander have briefed Cabinet on the plan, on the eve of a Budget in which the Chancellor is coming under intense pressure to inject vigour into an economy teetering on the brink of a triple-dip recession.
Health, schools, overseas aid and HM Revenue and Customs will be shielded from the cuts, and local government and police budgets will be protected for the first year, but other Whitehall departments will be told to deliver 1% savings on their day-to-day budgets for each of the two years 2013/14 and 2014/15, on top of cuts from previous budgets and autumn statements, the Prime Minister's official spokesman said.
Mr Osborne told Cabinet colleagues at a weekly meeting in 10 Downing Street that the savings were made possible because departments have under-spent their budgets this year by more than the historical average, according to forecasts to be published alongside the Budget on Wednesday.
The Chancellor has decided to take account of this under-spending when setting departmental budgets for the next two years, Cabinet was told.
The Ministry of Defence will be given special flexibility to roll over unspent money, which the Chancellor believes will more than compensate for the cumulative savings demanded from the department in December's Autumn Statement and the Budget. And capital spending plans across Whitehall will not be affected.
But departments such as environment, energy, transport and justice will have to find the 1% annual savings to day-to-day "resource" budgets in full. In total, Mr Osborne expects the change in spending plans to save the Treasury £2.5 billion over two years.
It is understood that the savings will be taken into account in Mr Osborne's Spending Review for 2015/16, to be unveiled in June, delivering around £1.2 billion of the £10 billion spending cuts which he is looking for in that year.
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