Media playback is unsupported on your device Media caption George Osborne: "This week is all about making clear that we are going to secure the recovery"

The Ministry of Defence has reached a budget deal which will see further civilian jobs cut but "no reduction in military capacity", George Osborne has said.

The chancellor, due to outline £11.5bn of savings across Whitehall in his Spending Review on Wednesday, added the economy was "out of intensive care".

He also said he was also looking at the affordability of pensioner benefits.

Labour said the economy was facing a "difficult few years".

Mr Osborne will outline cuts when he delivers his 2015/16 Spending Review, but is expected to announce investment in infrastructure projects, including roads, railways, education and science.

'Tough choice'

Speaking on BBC One's Andrew Marr Show, he said: "I've settled with the defence department. Many people thought that was going to be one of the biggest challenges."

He added that he and Defence Secretary Philip Hammond had come to agree on a "tough choice".

Analysis So one of the last hold-outs has reached a settlement with the Treasury, and the deal struck with the Ministry of Defence epitomises this whole spending review. Day-to-day spending - in this case civilian jobs - has been cut so that priorities like troop numbers and cyber security can be protected or enhanced. What will that mean for Vince Cable's business department, which is waiting until the eleventh hour to settle its budget? George Osborne also hoped to force Labour to take a position on spending cuts and Ed Balls says he is signed up, but crucially the shadow chancellor signalled that he would be prepared to borrow more in 2015 if it's for investment. And there is a consensus emerging between the parties that the affordability of benefits for pensioners needs to be considered at some point in the future, but that's a debate for another day.

Mr Osborne said: "The civilian [MoD staff] head count is going to be reduced. There will not be a reduction in military capability."

This comes on top of previous reductions in military and civilian staffing, as the government attempts to reduce the budget deficit.

An MoD spokesman said the settlement was "tough but deliverable", adding: "Further genuine efficiencies have been found which has ensured there will be no reductions in military output as a result."

Mr Osborne also announced that £10m a year would be made available to help veterans injured in recent campaigns and their families. This would come from fines imposed for the Libor bank interest rate-fixing scandal.

The chancellor said he had not reached a budget deal with Business Secretary Vince Cable for his department, but added that he was "confident we are going to do this in short order".

Amid the cuts, spending on health, schools and overseas aid have been ring-fenced.

Asked if this meant too big a squeeze on other areas of government spending, Mr Osborne said: "They are called ring-fenced, but they really are the public's priorities."

Mr Osborne said: "I'm confident we are coming out of intensive care and we can turn this country around. There's certainly a chance of a relapse if we abandon our plan."

'Big deficit'

Labour has said it would take winter fuel payments from the richest pensioners, but Prime Minister David Cameron made a pledge at the 2010 general election to protect them.

Mr Osborne said that commitment applied to this parliament, without committing to funding pensioner benefits beyond the 2015 election, acknowledging that "we have got to look at how we can afford them".

Media playback is unsupported on your device Media caption Ed Balls: "We will have to find different ways to make different choices"

He added: "When it comes to pensions and pensioner benefits, our society is getting older, we are going to be spending more on our older people. I want to make sure that's sustainable."

Mr Osborne also said: "All those pensioner benefits - not the basic state pension - all those other pensioner benefits, of course we have got to look at how we can afford them.

"I do think the simplest thing that we can do is to increase the pension age as we have done and set out those increases to 66 and 67.

"I don't want pensioners to be impoverished. I want pensioners to have a standard of living that reflects the fact they have worked hard and saved hard all their lives."

Shadow chancellor Ed Balls said the government should do more to boost the economy to avoid the need to make cuts.

He told BBC One's Andrew Marr Show he was expecting to "inherit a big deficit" after the next general election in 2015.

And he urged the coalition to spend an extra £10bn on infrastructure projects before then, adding: "I fear we could be in for a difficult few years."

Mr Balls said he did not expect to include a VAT cut in Labour's manifesto for the 2015 general election.

He added: "On current spending, day-to-day spending, we're saying we'll have to make changes within their plans, we're not going to be spending more.

"On capital spending, we're saying this year and next year, the chancellor should be investing to get the economy growing."

Labour leader Ed Miliband has announced that he would not be able to afford to reverse Mr Osborne's cuts should his party come to power in 2015.

For the Liberal Democrats, deputy leader Simon Hughes told BBC One's Sunday Politics his party wanted "the maximum investment we can deliver to get the economy going".