Osborne orders departments to plan for cuts up to 40 per cent

Chancellor George Osborne has ordered Government departments to draw up plans for spending cuts of up to 40% - slashing services and axing hundreds of thousands of jobs - the Treasury said tonight.

The instruction - to be confirmed in a letter from Treasury Chief Secretary Danny Alexander to Cabinet ministers - is the latest step in preparing for what is set to be the toughest spending review since the Second World War.

Officials stressed that what was being prepared was "initial planning assumptions" and that the cuts on that scale would not actually be implemented in the final settlements in the autumn. Nevertheless, the figures underline just how severe the review - which is due to be announced in October - will be.

The Office for Budget Responsibility has forecast that 600,000 public sector jobs will be lost as the coalition Government tackles the deficit.

In his emergency Budget last month, Mr Osborne warned that departments faced cuts averaging 25% over the next four years - apart from health and overseas aid whose budgets have been ring-fenced. However he also indicated that defence and education would receive favourable treatment.

The independent Institute for Fiscal Studies estimated that this could leave other departments facing cuts of 33%.

Mr Osborne has now instructed the Ministry of Defence and the Department for Education to draw up plans showing the impact that budget cuts of 10% and 20% would have. The rest of Whitehall has been told to prepare plans for cuts of 25% and 40%.

Ministers were informed of the latest preparations at the weekly meeting of the Cabinet on Tuesday, which was held for the first time since the new Government came to power outside London in Bradford.

A Treasury spokesman said: "We are determined to tackle the record budget deficit in order to keep rates lower for longer, protect jobs, and maintain the quality of essential public services.

"The Cabinet has been briefed on the planning assumptions that their departments should use for the initial phase of the spending review.

"These planning assumptions are not final settlements, and do not commit the Treasury or departments to final settlements.

"These assumptions will be negotiated so that we both tackle the deficit and support the freer, fairer and more responsible Britain we want to see."