THE Ministry of Defence is bracing itself for further civilian staff job losses under a budget-cutting deal agreed with Chancellor George Osborne.

Defence Secretary Philip Hammond and Mr Osborne reached the agreement, which will not involve any further reductions in military manpower, as negotiations continued across Whitehall ahead of Wednesday's spending review.

Mr Osborne refused to commit to protecting universal 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, about smaller details of the review.

But Mr Osborne told BBC1's Andrew Marr Show that he had finalised a settlement with the 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 head count 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."

Mr Osborne said it was important society did not forget about soldiers who have come back from conflicts in Iraq and Afghanistan with horrific injuries. He also confirmed plans to use fines from the banks to support wounded British troops and veterans.

He added: "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."

Mr Osborne also spoke about pensioner benefits.

While Labour has said it would take winter-fuel payments from the richest pensioners, David Cameron made a pledge at the General Election to protect them.

Mr Osborne said that commitment applied to this parliament, without committing to funding pensioner benefits beyond 2015, adding: "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,"

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, but if there was a case to invest in capital projects such as roads and infrastructure, Labour could increase borrowing.

Mr Balls also said he did not expect to include a VAT cut in Labour's manifesto for the 2015 General Election. He told the programme: "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." Mr Balls said Labour had been advocating a VAT cut, but the "balance of advantage" may shift towards capital spending before the next election.

On Wednesday the Chancellor will announce how a further £11.5 billion of cuts will be distributed across areas that have not had their budgets protected.

Mr Osborne said the economy was "moving from rescue to recovery" but added that "it is still going to be a challenge because the economic problems Britain built up over many years are considerable." An 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."