George Osborne has reserved £2 billion for work and pensions secretary Iain Duncan Smith's welfare reforms - but slashed benefits.
After a prolonged struggle with the Treasury Mr Duncan Smith has succeeded in securing funding for major reforms to the welfare system, the comprehensive spending review (CSR) revealed.
"The guiding rule will be this: it will always pay to work," Mr Osborne said.
"Those who get work will be better off than those who don't. It represents the greatest reform to our welfare state for a generation."
The universal credit will replace a range of benefits, including housing allowance, the working tax credit and disability benefit.
But the move is accompanied by a 26% overall reduction to the Department for Work and Pensions' budget.
"In the massive public consultation we conducted over the summer, the overwhelming message we received was that the British people think it is fair to cut welfare bills in order to protect important public services," Mr Osborne added.
He announced a raft of savings implemented as a result. These include moves to free the maximum savings credit award in pension credit for four years; an increase to the age threshold for the shared room rate in housing benefit from 25 to 35; and time-limit contributory employment and support allowance to one year.
Savings in the welfare bill have long been an ambition of chancellor George Osborne, whose 'three-strikes-and-you're-out' proposals from opposition is set to be introduced for benefits cheats.
A range of penalties will be introduced, from a £50 fine for mistakes on forms which could reasonably have been avoided to a three-year ban on benefits for repeat offenders.
Mr Osborne announced plans to cut the child benefit bill by withdrawing it from higher earners. Those earning over £44,000 will lose the benefit completely, but a couple each earning £40,000 will remain eligible.
Over the weekend it had been reported that further steps may have to be taken on child benefit, potentially removing it for over-16s. This was not deemed necessary, Mr Osborne told MPs today.
He said a new cap on benefits would be introduced ensuring that no family which does not work receives more in benefits than the average family which does go to work.
"That is a tough, but fair deal," he said.