Hospitals, police officers, nurseries and motorways are set to bear the brunt of £5 billion of spending cuts within two years.

The small print of the Pre-Budget Report (PBR) document reveals the start of substantial public sector cutbacks over the next five years.

The scale of the reductions for 2010 came as the Institute for Fiscal Studies estimated that public spending would be cut by a further £37 billion squeeze by 2014.

The PBR document shows public spending is now due to grow by only 1.1 per cent in real terms between April 2011 and March 2014. This means that spending will drop by 2.5 per cent as a proportion of national income over the same period – equivalent to a £37 billion cut, the institute said.

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Whitehall departments were taken aback yesterday by the proposals in the PBR document written by Treasury officials, which had apparently not been agreed in advance. The report makes clear that spending totals for 2010 will be readjusted once the £5 billion of cuts or “value-for-money savings” are shared across Whitehall.

The Department of Health said it was still in negotiations with the Treasury over proposals to scrap £3 billion of planned hospital projects by using the NHS estate more effectively.

The cutbacks could be achieved by merging hospitals or mothballing expensive extensions planned in future years, but no decisions have been taken. The document merely says that “improvements to NHS estate utilisa-tion will reduce the need for new hospital space by up to £3 billion”.

In addition the NHS expects to find money by extending tariff charges paid by primary care trusts for operations and procedures in hospital to care for the mentally ill. A Department of Health spokesman said this would apply to mental health services in hospitals and the wider community.

The document also suggests big savings can be made by ensuring that all prisons in future are built and managed by the private sector. It also identifies £1 billion that could be found by “increasing the productivity of the police workforce”.

One of the most contentious value for money proposals is an apparent reversal of policy on free child care for preschool children. The document suggests that promises to extend free nursery care for all two-year-olds beyond children from deprived families is unlikely to happen. The Treasury has also resisted strong pressure from the childcare lobby to extend free childcare for three and four-year-olds beyond the levels of 15 hours a week that they will be entitled to by 2010.

The PBR document argues that so far value-for-money evidence has suggested that providing free care for deprived two-year-olds will have “a more positive outcomes than extending the number of free hours of child care available to three and four-year-olds beyond the 15 hours a week they will receive by 2010-11.”

Michael Gove, the Shadow Education Secretary, said the comments suggested that the Prime Minister’s conference pledge to extend free care for all two-year-olds was now a pipe dream. “Gordon Brown is going back on a pledge he made just a few weeks ago to provide free childcare for all two-year-olds,” he said.

Other proposals include £150 million of savings at the Highways Agency and an extension of the current programme to extend motorways by using the hard shoulder rather than widening the road.

The IFS pointed out that at the last general election Labour had claimed the Tories were putting public services at risk by proposing £35 billion of “cuts”, which were in practice only a matter of the public sector shrinking relative to a growing economy. Robert Chote, the IFS director, said that by 2012-13 the sharp squeeze on spending now planned by the Chancellor amounted to cuts in cash spending worth £19 billion compared with the Treasury’s previously published plans.

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