The unprecedented public spending announcement comes before his Mansion House speech this evening where he will aim to convince the City that the reforms are best for Britain.

In his Commons statement he said: "The central challenge is to combine prudence and stability in public finances with investment and reform in public services."

He said that "strong public services would be based on strong public finances, " and that the reforms would end the "boom and bust which has prevented this country from achieving its potential for 30 years".

The chancellor said that public finances would be governed by two rules: over the current economic cycle current spending would be covered by revenues and that there must be a prudent debt to GDP ratio.

Redefine the role of government

He said the comprehensive spending review to be completed next month was the "most comprehensive and in depth study" carried out and that it would "redefine the role of government so that it is enabling and empowering rather than centralising and controlling".

Mr Brown said that public services would "modernise and reform". He said that investment would be made "only in return for reform".

Central to the issue of public spending, he announced that the annual spending review is to be abolished and replaced with "firm plans and fixed budgets for three years at a time".