Years of economic pain lie ahead, warns Cameron

Whitehall budgets will shrink by tens of billions of pounds

George Osborne will tomorrow take the first steps towards the heaviest cuts in public spending in modern British political history.

The Chancellor will set out the timetable for a spending review which is expected to result in tens of billions of pounds being slashed from Whitehall budgets in the autumn.

The extent of the financial squeeze will be underlined today by David Cameron, in a warning of "painful times" ahead. But the Prime Minister will insist that the Government cannot duck difficult decisions over reducing the £156bn budget deficit.

Mr Osborne and his Liberal Democrat deputy, Danny Alexander, the Chief Secretary to the Treasury, will promise that the spending review will lead to a "revolution" in public services – and insist that frontline services will not be affected.

But the coalition Government's words will be seen as a barely coded warning that the state will inevitably have to withdraw from many areas that are regarded as non-essential – with heavy job losses the likely result.

Treasury ministers are drawing inspiration from Canada, whose government tackled its huge national deficit by slashing federal budgets by 20 per cent over four years.

One idea they are considering is the establishment of a "star chamber" in which ministers would scrutinise their colleagues' proposals for cutting budgets and running public services more cost-effectively.

The Government is also preparing to bring in Lord Browne of Madingley, the former chief executive of BP, to oversee ministers' efforts to find savings. He is expected to lead a team of senior business figures who will sit on the boards of Whitehall departments.

Mr Osborne and Mr Alexander will commit themselves tomorrow to an unprecedented public consultation exercise – to include private industry, trade unions and the voluntary sector – on the future shape of the state.

A Treasury source insisted that there needed to be a "fundamental re-evaluation" of how services were provided to the public – and that it would be used to drive up standards.

The source said: "Given the massive scale of the challenge facing the new government, we need to throw open the doors of Whitehall and encourage new thinking.

"That is the only way to revolutionise government and provide the high-quality public services that people deserve. Anyone who thinks the spending review is just about saving money is missing the point. This is a once-in-a-generation opportunity to transform the way that government works."

Government sources said ministers would be working "flat out" over the summer on the spending plans, but dismissed as speculation suggestions that they were considering freezing benefits and cutting child tax credits.

They insisted the administration has shown its determination to make tough decisions by already setting out plans to trim public spending by £6bn in the current financial year. The Budget on 22 June is also expected to foreshadow some spending cuts and include some tax-raising measures.

In a speech today, Mr Cameron will say: "The decisions we make will affect every single person in our country, and the effects of those decisions will stay with us for years, perhaps decades, to come." He will promise to go about cutting the deficit in a manner that is "open, responsible and fair". The Prime Minister, who will warn that the scale of the problem is even bigger than he initially believed, will say: "I want this government to carry out Britain's unavoidable deficit reduction plan in a way that strengthens and unites the country."

In an interview with The Sunday Times yesterday, Mr Cameron refused to be drawn on speculation that value added tax would be increased in the Budget. But he hinted that plans for an increase in capital gains tax could be diluted by introducing a taper system geared to hit hardest people who benefit from instant cash windfalls, rather than long-term investors. "I did not come into politics to punish people who want to do the right thing and save," he said.

The Prime Minister said the new administration would be trying to "take people with us" as it embarks on its programme of cuts. "Proper statesmanship is taking the right action, explaining to people the purpose behind the pain," he said.