NHS funding will increase by just 0.1 per cent above inflation from next year onwards, the chancellor has confirmed - the minimum required to meet the government’s “real terms increase” pledge.

The government has confirmed dramatic cuts to public spending in the next four years, and said there will be a minimal real terms increase in health spend each year.

He said health spending would increase from £104bn in 2010-11 to £114bn in 2014-15. The government said this was “a total increase of 0.4 per cent in real terms” over the period.

That represents an annual real terms increase over inflation of approximately 0.1 per cent. The Conservatives had promised annual real terms increases before the general election.

However the “real terms increase” includes £1bn of funds previously set aside for NHS capital spending which will now be spent on social care by 2014-15.

If that £1bn is excluded from the calculation, the real change in the NHS budget over the period is a cut of 0.6 per cent.

Mr Osbourne said the cash increase in the NHS budget  would be funded by cuts in other areas. He said: “The NHS is an intrinsic part of the fabric of our country. To govern is to choose, and we have chosen the NHS.”

He said it did not mean the government was “letting the health department off” the need to improve efficiency, and said NHS productivity had fallen under the previous government. Mr Osbourne said: “[The DH] are aiming to save £20bn by 2014 but the money we save will be reinvested.”

Other announcements affecting health include:

NHS capital funding will be cut by 17 per cent in real terms over the four years, from £5.1bn in 2010-11 to £4.6bn in 2014-15.

Plans made under the previous government for a one week cancer diagnostics target; one-on-one nursing care for cancer patients; and free prescriptions for people with long term conditions have been scrapped because of cost.

There will be a ring fenced allocation to local authorities for public health, which is transferring from primary care trusts under reform plans.

The government plans to save £1.8bn annually from public sector pensions by 2014-15.

All departments will publish “reform plans for the next four years” next month.

NHS chief executive Sir David Nicholson has written to NHS and local authority boards in response to the spending review saying, “all of us who care deeply about the NHS and the wider health and social care system should warmly welcome the government’s commitment to maintain investment in the sector”.

He said it meant the assessment he made 18 months ago - that the NHS needed to make £15-20bn efficiency savings over the period - had been “borne out and it is more important than ever that we pursue those quality and productivity improvements [to make the savings]”. He said: “Every penny of those savings will be available for reinvestment in frontline healthcare.”

Sir David said the settlement was also “a fantastic opportunity to support integration between health and social care services at the local level”.