A £5 billion investment in schools and other capital projects will be partly paid for by deeper cuts in Whitehall departmental budgets.
Chancellor George Osborne and Chief Secretary Danny Alexander briefed the Cabinet this morning on the plans, which will be confirmed in tomorrow's Autumn Statement.
Whitehall departments will be expected to cut day-to-day spending by 1% (£950 million) in 2013/14 and 2% (£2.5 billion) in 2014/15.
But health, schools, international aid, HM Revenue and Customs and nuclear decommissioning will be protected.
The new investment will be targeted at transport, skills, science and schools, with an additional £1 billion going towards new schools, funding new places in areas with the greatest need.
Some 100 new academies and free schools are expected to be built in the next two years.
The cuts apply directly to England only, but there will be knock-on effects for Scotland, Wales and Northern Ireland under the complicated formula which determines central funding for the different parts of the United Kingdom.
Local government will be exempted from the cuts in the first year, as it is already having to find savings to deliver a council tax freeze, but councils will be required to meet the 2% cut in 2014/15.
Meanwhile, the Ministry of Defence will be given additional flexibility to roll over underspends - which last year amounted to almost £400 million - from one year to the next. As a result, ministers believe that there will be no reduction in military manpower and core MoD budgets.
The cuts across Whitehall departments relate to day-to-day resource spending, rather than capital spending projects.
The imposition of cuts means that the new spending comes within the Government's existing fiscal plans and involves no additional state borrowing.
The decision to slash Whitehall budgets comes after a mid-term spending assessment carried out by Mr Alexander, which made clear that many departments were over-achieving on planned savings.
Across Whitehall, departments have underspent by a total of £3 billion over the last two years, the review found.
This finding gave Mr Osborne reassurance that it would be possible to divert spending to more economically valuable areas.
And the Treasury believes there is scope for further efficiencies. If all departments reduce their administrative spending by the same amount as the Department for Education, they would save almost £1 billion by 2014/15.
Ministers believe that today's announcement will mean the Government is able to deliver higher levels of annual capital investment, as a proportion of GDP, than under the Labour administrations of 1997/2010.