There will be further job losses at the Ministry of Defence (MoD) under a budget deal agreed with Chancellor George Osborne.
Defence Secretary Philip Hammond and Osborne agreed the deal, which will not involve any further reductions in military manpower, last night as negotiations continued across Whitehall ahead of Wednesday's spending review.
Osborne refused to commit to protect unversal pensioner payments such as winter fuel allowance in the review, which covers 2015/16 beyond the end of the current parliament.
Talks were still continuing to reach agreement with other ministries, including Vince Cable's Business Department, and Osborne acknowledged there were still arguments about the "small details" with his Liberal Democrat Cabinet colleague.
But Osborne told BBC1's Andrew Marr Show that he had finalised a settlement with Hammond's MoD and also confirmed plans to use fines from the banks to help support the welfare of troops and veterans.
The Chancellor said: "I have settled the Defence department, which people thought was going to be one of the biggest and most difficult challenges, so I have agreed with Philip Hammond a defence budget.
"It's going to involve some tough choices. The civilian headcount is going to have to reduce in our defence department, we are going to have to renegotiate, with some of our big suppliers, the contracts.
"But I can tell you there will not be a reduction in our military capability, we are not going to reduce the number of our sailors, soldiers and airmen.
"In fact we are going to be able to spend some more money on things like cyber, which is the new frontier in defence."
Turning to upholding the military covenant, Osborne said: "We are dealing now with a lot of people who have come back from wars in Iraq and Afghanistan with horrific injuries. They have recovered from those injuries or are recovering.
"I want to make sure that as a society we don't forget about these people long after the war is over so we are committing for the rest of these people's lives to support the military covenant, to support them, to go on spending £10 million a year on these sorts of causes.
"We can do this in part because we are using the money we have taken off bankers involved in the Libor scandal. So the people who demonstrated the very worst of British values in the Libor scandal, in the City, are now supporting those who have demonstrated the very best of British values - our soldiers who gave so much to defend the country."
He said Businnes, Innovation and Skills was one of the departments yet to agree a settlement. But he added: "There is actually not a massive argument.
"Of course we are arguing about the small details but not the big picture. Actually, Vince Cable and I want to achieve the same things, which is support the things that back the economy.
"I, as a personal priority, want to see science supported, that's part of this budget, because Britain leads the world in science."
Labour has said it would take winter fuel payments from the richest pensioners, but David Cameron made a pledge at the general election to protect the handouts.
But Osborne said that commitment applied to this parliament without committing to funding pensioner benefits beyond the 2015 poll, acknowledging "we have got to look at how we can afford them".
He said: "We made a very clear promise about this parliament and the winter fuel payment in this parliament. We believe in keeping our promises to the British people.
"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."
He added: "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.
"I would focus instead on the fact that we are living longer than trying to cut the benefits that are going to pensioners."
He said that after 2015 "we will have to consider the promises we make for the next parliament but I think having looked at the way we have behaved in this parliament, not only have we kept our promises but we have made sure that this country can afford the budget".
Shadow chancellor Ed Balls indicated Labour could borrow more if the party wins the next election.
He said he would make changes to current "day-to-day" expenditure without spending more than the Chancellor's plans but if there was a case to invest in capital projects such as roads and infrastructure, Labour could increase borrowing.
Balls also said he did not expect to include a VAT cut in Labour's manifesto for the 2015 General Election.
He told the Andrew Marr Show: "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.
"I'm not going to say to you today two years ahead what our judgement will be, we'll wait until nearer the time.
"But do I think there's a case, there could be a case, in two years' time, for still investing in roads and our infrastructure to get the economy moving and the deficit down, yes."
Asked if he had left the door open for more borrowing if Labour were in government, he said: "Yes, of course. The reason is because if the economy is still weak then, living standards are still falling, if youth unemployment is still high, and if there's still a case on our long-term infrastructure to get things moving with interest rates low, of course there's a case for doing that.
"It would be economically very foolish to deny that.
"If George Osborne had done that last year and the year before we wouldn't have had such a flatlining economy.
"I think he is so complacent and out of touch, I'm not going to make the same mistake."
Balls said Labour have been advocating a VAT cut but the "balance of advantage" may shift towards capital spending before the next election.
He said: "Over the next year, if the recovery takes hold, as I hope it will, it will be not a strong one, but if it takes hold, I said last week or two weeks ago, the balance of advantage will shift from a VAT cut which is what we would do now and would have done to long-term capital investment as the best way to keep the economy growing.
"Do I expect the VAT cut to be part of our manifesto in two years' time? No of course not and I never envisaged that.
"To be honest, we have been advocating it for a year and a half longer than I expected because George Osborne's failure on the economy has been so catastrophic."
On Wednesday the Chancellor will announce how a further £11.5 billion of cuts will be distributed across areas which have not had their budgets protected.
Osborne said the economy was "moving from rescue to recovery" but "it is still going to be a challenge because the economic problems Britain built up over many years are considerable."
He told the Andrew Marr Show: "I think we can turn this country around but we have got to stick at the plan, we have got to stick at the plan, we have got to stick at the economic plan that is reducing our debts, making our businesses more competitive, helping to create jobs, making sure Britain can win the global race."
Although the economy was "out of intensive care" there "certainly is the chance for a relapse" if measures to bring down the deficit were abandoned.
A MoD spokeswoman said: "A tough but deliverable settlement has been achieved that assists the Treasury's savings targets while protecting military manpower, capabilities and a fully funded but efficient equipment programme.
"Further genuine efficiencies have been found which has ensured there will be no reductions in military output as a result."
Liberal Democrat deputy leader Simon Hughes hinted he expected more support for housebuilding to be announced.
He told BBC1's Sunday Politics building affordable homes would be a "central plank" of the next Lib Dem manifesto.
Challenged on whether the coalition's record on housebuilding was worse than the previous Labour administration Hughes said: "I don't think it its .... I think you will hear more about that this week."
Asked about the clash between Cable and the Treasury, including his fellow Lib Dem minister Danny Alexander, Hughes said: "Everybody is agreed we have to continue with deficit reduction, we have reduced our deficit by a third.
"You also know we have ringfenced areas like the NHS, which Labour haven't, like overseas development, like schools budgets.
"There is a battle to make sure that we get the investment in jobs and apprenticeships and science and so on."
Hughes said he wanted the "maximum investment that we can possibly deliver to get the economy growing".