The budgets of Whitehall departments will be cut by an average of 19 per cent – under the Spending Review. The figure was expected to be anything up to 25 per cent.
Osborne defended the jobs cull by claiming many roles would disappear under “natural wastage” over the next four years.
He pointed to the creation of 178,000 jobs in the private sector over the past three months as an example how it would pick up some of the slack.
Osborne told the House of Commons: "Today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt."
Of criticism levelled at the government over the severity of the cuts, he said: "We have the largest structural debt in Europe …to back down now would be the road to economic ruin."
The MoD is facing cuts of eight per cent - less than most other departments but enough to mean 42,000 service personnel and civil servants will lose their jobs over the next five years.
He also confirmed plans to increase pension age to 66 would be triggered earlier than expected.
Health and education budgets were protected under the review.
* About 490,000 public sector jobs likely to be lost
* Average 19 per cent four-year cut in departmental budgets
* Structural deficit to be eliminated by 2015
* £7bn in additional welfare budget cuts
* Police funding cut by four per cent a year
* Retirement age to rise from 65 to 66 by 2020
* NHS budget protected; £2bn extra for social care
* Schools budget to rise every year until 2015
* £30bn capital spending on transport
* Permanent bank levy