Image caption David Cameron and Nick Clegg gave details of the plan during a school visit

David Cameron has hailed plans to squeeze spending in most Whitehall departments and use the money to build new schools and transport schemes.

All but four departments will be asked to save an extra 1% next year and a further 2% the following year.

The PM said the £5bn saved would be spent on capital projects to kickstart growth and make the UK "work better".

Labour said the announcement showed that axing their school building plans had been a "catastrophic mistake".

Treasury sources say that Wednesday's Autumn Statement will spell out how £1bn will go towards building 100 new free schools and academies, creating an additional 50,000 new school places.

Health, education, international development, HM Revenue and Customs and nuclear decommissioning will be protected from this latest squeeze.

Frontline services in all other departments will also be shielded with a bulk of the savings coming from administration and back office staff, government sources say.

But Whitehall departments will be expected to cut day-to-day spending by 1% (£950m) in 2013/14 and 2% (£2.5bn) in 2014/15.

Under the plan, the government believes it will be able to spend more annually on capital investment, as a proportion of GDP, than Labour did when it was in power.

'Taking longer'

The decision to cut Whitehall budgets comes after a mid-term spending review carried out by Chief Secretary to the Treasury Danny Alexander, which suggested many departments were over-achieving on planned savings.

Analysis Parents with children in primary schools, especially in England's big cities, will have seen temporary classrooms mushrooming all around them. So the announcement of £1bn funding over two years for an extra 50,000 places will be seen as helping to ease the squeeze. The funding will support up to 100 building projects - opening new schools and expanding existing ones, with a local bidding process determining the allocation. But it's against the background of a soaring birth rate and unprecedented demand. Official forecasts earlier this year showed the primary school population is set to grow by 450,000 in five years. This isn't evenly spread across the country - with some local education authorities, also under financial and political pressure, trying to plan for a 40% increase. Primary schools are being transformed from one and two form entries to three and four classes in each year. It's one of those running-down-an-up-escalator challenges - with extra funding competing with the rising pressure on places.

Departments have under-spent by a total of £3bn over the past two years, the review found, reassuring Chancellor George Osborne that it would be possible to divert spending into more economically valuable areas.

The Treasury believes there may be scope for further efficiencies. If all departments reduce their administrative spending by the same amount as the Department for Education, they would save almost £1bn by 2014/15, sources said.

Mr Osborne and Mr Alexander briefed the cabinet on the plans on Tuesday morning, which will be confirmed in the Autumn Statement, when Mr Osborne updates MPs on the state of the nation's finances.

During a school visit 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."

The changes apply to England only, but will have knock-on effects in Scotland, Wales and Northern Ireland because of the funding formula used.

Deputy Prime Minister Nick Clegg, on the same school visit, said: "Today's announcement is all about making sure that the money we do have available to us is used for the best possible purposes - not tied up in Whitehall but used to rebuild schools, to improve our transport infrastructure, to invest in the things that this country needs for the long term."

The Office for Budget Responsibility (OBR) is expected to downgrade its forecasts for growth in figures to be released alongside Mr Osborne's statement.

If the figures are as bad as many expect, the chancellor could miss his targets for paying off Britain's debts.

On Sunday, Mr Osborne admitted cutting the deficit was "taking longer" than planned.

'Extra classroom places'

Labour leader Ed Miliband said that Mr Osborne's policies had been a "terrible failure" which were "bad for Britain... and I'm afraid what we're going to see is ordinary families paying the price of that".

He told the BBC: "What we need, and what we need George Osborne to admit, is if you've been trying an approach for two and a half years and it hasn't worked, you don't just keep ploughing on regardless."

What is the Autumn Statement? One of the two major statements the Treasury has to make to Parliament every year

Since 1997 the main Budget - which contains the bulk of tax, benefit and duty changes - has been in the spring before the start of the tax year in April

The second statement has tended to focus on updating forecasts for government finances

Over the past few years this distinction has become blurred, with the Autumn Statement becoming more of a mini Budget

Under the last Labour government it was called the pre-Budget report In depth: Autumn Statement

Shadow chief secretary to the Treasury Rachel Reeves said the "extra funding for new free schools will be smaller than the huge cuts he made two years ago to school and college buildings. "

The new money for school places comes on top of the government announcing a £2bn Priority School Building Programme, which will fund 261 school rebuilding projects in England over five years.

An initial 42 schools, among the most dilapidated, were named in a first wave.

This scheme replaced the previous Labour government's Building Schools for the Future project, which had been expected to cost £55bn, but which was scrapped by the coalition government.

Extra classroom places are likely to relieve some of the increasing pressure on primary schools, particularly in London and the big cities, where a surge in the birth rate has seen primary schools struggling to cope with the rising demand.

Official figures published earlier this year showed that there would need to be places for an extra 450,000 primary school pupils in England by 2015.

Many schools have had to add extra classrooms - and a growing number of primary schools will have to expand to more than a thousand pupils.