"We are all in this together," said the Chancellor George Osborne as he unveiled the comprehensive spending review to the House of Commons.

Claiming to bring sanity to public finances, he added: "We have made the tough choices ... a stronger Britain starts here."

Shadow Chancellor Alan Johnson said they were the deepest cuts to public spending in living memory. However, Osborne revealed that the average cut to government departmental budgets was 19 per cent, one per cent lower than Labour had said it would deliver.

Today is the day when Britain steps back from the brink, Osborne said, as he presented his four year plan "to put our public services and welfare state on a sustainable footing for the long-term". It is a hard road, he said but it leads to a better future and to back down now and abandon our plans would be the road to economic ruin.

The government is investing in the future rather than in the bills of the past, Osborne said, and has chosen to spend on the nation's main priorities and cut the waste and reform the welfare system that the country can no longer afford. The Chancellor said that the UK was paying £43bn a year in debt interest and while Labour had planned that the deficit would still grow by 2014, this government was taking Britain out of the financial danger zone.

Revealing that the Office of Budget Responsibility (OBR) had monitored everything in the review, Osborne said that public spending would be £651bn this year then £665bn, £679bn and £693bn, with public spending reaching £740bn in 2014/15, in real terms the same level as in 2008. Osborne pointed out that debt payments are still increasing but debt interest payments will be lower by £5bn over the course of the spending review, equivalent to the salaries of 100,000 teachers.

The spending review is underpinned by a far reaching programme of public service reform, the Chancellor claimed, and the government was "squeezing every last penny we can find out of waste", including going further than thought possible in cutting back office costs. "We promised £3bn of Whitehall savings, we will deliver £6bn," Osborne said.

The OBR had forecast 490,000 fewer public sector jobs over the next four years and much of that would be through natural wastage, the Chancellor said. That was unavoidable and the government would do everything it could to provide alternative work, adding that unless it dealt with this record debt decisively many more jobs would be lost.

He also revealed that the Cabinet Office budget would be cut by £55m by 2014/15, the Treasury budget by 33 per cent, there would be a freeze in civil list costs this year and spending would fall by 14 per cent up to 2014/15 but there will be £1m for the diamond jubilee.

Osborne also spoke of a "massive devolution of financial control to councils" with all local government revenue grant ring-fencing to end from April next year. Councils and their leaders will no longer have to report on 4700 local area agreement targets, he said and local authorities will be able to fund projects by borrowing against future revenues from business rates. However, there will be a 7.1 per cent cut to council funding over four years.

The social care budget has been increased by £1bn with a further £1bn coming through the NHS working with councils to ensure elderly people do not fall between the cracks, the Chancellor said, claiming that the government will also reform the social housing system, making it more flexible and enabling 150,000 new affordable homes to be built over the next 10 years.

The Department for Communities and Local Government would see its budget reduced to £1.1bn, the Home office budget would be cut by 6 per cent a year, there would be an £11.5bn budget for international development by 2014/15, police spending would fall by 4 per cent a year, the Ministry of Justice's budget would be cut by 6 per cent per annum to reach £7bn by 2014/15, and £1.3bn of capital would be made available for prisons.

Citing fairness, Osborne said a fair government makes sure those with the broadest shoulders bear the greatest burden. Those with the highest incomes will contribute more to this programme than anyone else, he said, claiming to extract "the maximum sustainable revenues" from financial services.

He added that the government will spend £900m more on tax evasion and fraud to collect a missing £7bn in tax revenues. Also, £5bn is being lost through benefit cheats – but "we will protect the most vulnerable", adding: "Never again will those who worked hard all their lives be insulted with a state pension increase of just 75 pence". The state pension age for men and women will reach 66 by 2020, four years earlier than planned, and by the next parliament this will save £5bn a year. The highest paid public servants who get the highest pensions should make the biggest contributions, Osborne said, and there will be £1.8bn savings in public sector pensions per year over and above what the previous government implemented.

The truth is that the welfare system is failing many citizens, the Chancellor said, with people finding themselves "trapped" for their entire lifetimes. Welfare spending now accounts for one third of all spending and this is "totally unsustainable and unfair". It will always pay to work, Osborne said, adding: "I have set aside £2bn to make this happen." Drawing on the skills of the voluntary sector and private sector, people will be helped if they don't have the confidence or skills to apply for jobs.

Further welfare savings included time limiting the contributory support and work allowance to one year, increasing the age threshold for benefits from 25 to 35, giving local authorities greater flexibility to manage council tax, controlling the cost of tax credits, changing the working tax credit eligibility rules so that parents must work 24 hours between them, and introducing a new cap on benefits. Those in receipt of disability living allowance and the armed forces will be exempt. But he also increased the child element of the child tax credit above indexation by £110 over the next two years, more than promised by the last government, so that the spending review would have no negative impact on child poverty over the next two years. Temporary cold weather payments are being made permanent, Osborne added, saying "they should be for life, not just general elections".

Turning to the NHS, Osborne said that total health spending will rise each year above inflation - £104bn this year, £114bn by end of 2014/15 ... "to govern is to choose and we have chosen the NHS". But by 2014 the government is aiming to save up to £20bn by demanding better value for money. A new cancer drug fund will be provided, spending on research, treatment of dementia, new hospital schemes and consequential allocations for Scotland, Wales and Northern Ireland. They will all see rises in their budgets but rises below inflation.

Equitable Life customers will get £1.5bn compensation, two thirds of which will be found in this spending review period. These measures will mean that it will always pay to work and there is help for those who saved and lost everything, Osborne said.

There would also be the largest ever investment in adult apprenticeships but the 'Train to gain' scheme will be scrapped. Community post offices will be protected, the science budget will stay at £4.6bn a year but the business budget will be cut by 7.1 per cent.

Turning to climate change, the Department of Energy and Climate Change will make 5 per cent savings a year, capital funding of up to £1bn will be provided for one of the world's biggest carbon capture and storage facilities, there will be a green investment bank with £1bn of funding "but I hope much more will be raised from the private sector and from future government asset sales". Osborne said "We want Britain to be the leader of the new green economy", adding that the government will encourage home energy efficiency. At the same time, Defra will deliver resource savings of 8 per cent a year but flooding protection for 145,000 homes will be improved.

The culture, media and sport budget will be £1.1bn by 2014/15, with reductions limited to 15 per cent and the government will continue to fund free entry to museums and galleries. The BBC will now fund BBC World Service, BBC Monitor and S4C, and the licence fee will be frozen for the next six years, equivalent to a 16 per cent saving in the BBC budget.

For the Department for Transport Osborne said there would be £30bn spent over the next four years on transport projects, including M62 expansion, rail platform improvements, £500m on Tyne and Wear Metro and Tees Valley network, rail electrification and the new Mersey suspension bridge, major rail investments in Wales, Crossrail, M1 and M46 improvements in the East Midlands, a new transport scheme for Weymouth, and the cap on regulated rail fares will rise by 3 per cent over inflation from 2012. The regional growth fund will get another £5bn.

There will be a real increase in the money for schools for each of the next four years, he said, rising from £35bn to £39bn and schools will be allowed to spend their money as they see fit. There will also be a "real incentive", the £2.5bn pupil premium, for schools to take children from poorer backgrounds. Sure Start services will be protected in cash terms and disadvantaged two year olds will get 15 hours free education. The educational maintenance allowance for 16-19 year olds will be replaced. And although Building Schools for the Future has been scrapped, the government will invest an extra £15bn to improve schools.

Finally, Osborne ended with a flourish: "I can tell the house that the average savings in government departments will be lower than the previous government implied – instead of cuts of 20 per cent there will be cuts of 19 per cent over the next four years," he said to rapture from the government benches.

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