George Osborne goes for growth (by firing 10,000 civil servants)

Chancellor warns he will squeeze departmental budgets so he can find £5bn to boost economy

Chancellor of the Exchequer George Osborne (left) and Chief secretary to the treasury Danny Alexander leave number 11, Downing Street (Getty Images)

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 today 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 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.”