J.S.
Your son was likely picking on the other boy BECAUSE he was picked on for the past four years. He felt powerless and bullied for years and the tables turned and felt a bit of power in doing it to someone else. It actually happens quite often. Children who are bullied in the home or by other people will very often become bullies themselves in order to feel some control and power.
If this was a first time incident, he may just need a reminder of how he felt when the very same things were done to him. He needs to be able to empathize with the boy he picked on. He also needs to apologize to the other child. A written apology would be a great idea.
Apart from that I would remove one important privilege that will have a strong affect on him. You can't realistically remove everything he enjoys and loves. That's not really fair. He's young and it was the first offense. Plus, it will make everyone in the house miserable. So rather than take EVERYTHING away from him you take away one very important privilege, so if he's looking forward to that birthday party then take it away and make sure he knows why. If you also ground him, I wouldn't take away all things he enjoys, especially if they center around family time. Don't take away his toys. No video games unless he's playing with you or dad. No TV unless he's watching with you or dad. I'd keep that grounding through Sunday evening, but with a new week starting on Monday I would also start his week fresh at home and end his punishment.