Budget: Extra £2.5bn Boost For Spending
George Osborne has ordered government departments to slash their budgets by another £2.5bn to fund extra capital spending.
The Chancellor and Chief Secretary to the Treasury Danny Alexander told ministers that they can afford to trim another 1% a year until 2015.
Mr Osborne said at Cabinet that it was possible because departments have under-spent their budgets this year by more than the average.
The extra cuts will not hit the departments protected by ring-fences - the NHS, international aid and schools. HMRC is also protected, as is the police budget for the first year.
There is no detail yet on how the extra cash will be spent, but it will help Mr Osborne satisfy critics that he is not doing enough to boost growth.
The announcement comes on the eve of his Budget, in which he is under intense pressure to inject some life into an economy teetering on the brink of a triple-dip recession.
The Ministry of Defence will be allowed to roll over unspent money to compensate for the cuts being demanded from the department.
This flexibility is worth £1.6bn to the department over the next two years - more than the total value of the extra 1% in cuts for 2013/14 and 2014/15.
But others including environment, energy, transport and justice will have to find the 1% annual savings to day-to-day resource budgets in full.
The cuts will also be reflected in the central Government funding arrangements for Scotland, Wales and Northern Ireland.
Total annual underspends across Whitehall departments have averaged around £6bn since 2007.
Number 10 said the forecasts for 2012/13, which will be announced by the Office for Budget Responsibility alongside the Budget, are expected to be "somewhat higher".
Cabinet ministers including Philip Hammond have recently gone public with concerns at the level of cuts their departments are likely to face in June's Spending Review.
But the PM's spokesman said Mr Osborne's announcement was greeted with"unanimous agreement around the Cabinet table that it was the right thing to do".
TUC general secretary Frances O'Grady said: "With the economy stagnating, the pressure is on the Chancellor to deliver a pro-growth Budget.
"But spending just £2.5bn a year more on infrastructure projects will boost growth by a measly 0.06%. Worse still, funding it through departmental spending cuts will mean further reductions in public services.
"With interest rates negative in real terms, the Chancellor has the perfect opportunity to invest in Britain's future, rather than raiding departmental budgets to cover his failed economic strategy."