Osborne shocks ministers with demand for 40 per cent budget cuts

Thousands more jobs in key public services are now under threat after the Chancellor, George Osborne, last night issued a shock edict demanding spending cuts of up to 40 per cent across Whitehall – 15 percentage points more than threatened in his emergency Budget last month.

The Chancellor has ordered cabinet ministers to plan for even deeper cuts to jobs and services over the next four years as part of his crisis plan to tackle the UK's £155bn budget deficit.

In a letter to David Cameron this weekend, the Chief Secretary to the Treasury, Danny Alexander, will confirm that departments already struggling to produce a blueprint for cutting spending by a quarter will now have to submit additional plans that could reduce their departmental budgets by two-fifths. The alternative packages will be weighed up in advance of a crucial Whitehall spending review in the autumn.

The higher figure would inevitably force departments to shed more jobs and slim down services, provoking an explosion of protests from unions and groups and individuals who depend on services under threat.

In his Budget less than two weeks ago, Mr Osborne announced that almost all departments would endure real-term cuts of 25 per cent over four years. The independent Office for Budget Responsibility subsequently warned that the cuts programme would spark job losses of 600,000 across the public sector.

But Mr Osborne has now returned to his cabinet colleagues and warned that even greater savings may be required. He told a cabinet meeting last week that, as part of the "initial phase" of the spending review, ministers would have to produce two models of cuts in their departments' budgets – one showing the impact of 25 per cent reductions, and another of 40 per cent. Administrative budgets could be cut by up to half.

Health and International Development had already been granted immunity from the cuts. Mr Osborne has now confirmed that Defence and Education will also be granted a degree of protection, proposing cuts of between 10 per cent and 20 per cent.

However, if he opts for the lower figure, other departments will be forced to make up the difference. The Institute for Fiscal Studies has calculated that if schools and defence were given a 10 per cent cuts target, the rest of Whitehall would be cut by 33 per cent.

The most obvious victim of the increased requirements would be the Home Office, where a 40 per cent drop in funding would inevitably mean further cuts to the police service, which accounts for two-thirds of the £9.4bn budget this year. The department is already mulling cuts of up to 35,000 officers, but civilian staff would also be hit, along with other bodies such as the UK Border Agency.

But, with the other "unprotected" departments including Justice, Transport, Communities and Business, the impact of further cuts would be wide-ranging.

The Treasury claims that more than 30,000 public-sector workers have already responded to the Chancellor's appeal for suggestions of how to reduce spending across Whitehall.

But Mr Osborne is preparing to announce that the financial crisis is so severe that more dramatic measures are required. The admission that even 25 per cent spending cuts are "at the low end" of the scale will be a chilling warning to union leaders who are already trying to work out how to respond to cuts already announced.

The revelations will dominate a TUC conference on "Stronger Unions", in London tomorrow. The Unison general secretary, Dave Prentis, will speak at the event, which will include a session entitled "Speaking up for Public Services".

Mr Osborne is expected to defend the increased demands by insisting that the size of the deficit requires drastic measures. Sources stress that Labour's pre-election plans had already implied cuts of 20 per cent around Whitehall.

A Treasury spokesman said: "We are determined to tackle the 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 assumptions that their departments should use for the initial phase of the spending review. These assumptions are not final settlements [and] will be negotiated so that we both tackle the deficit and support the freer, fairer and more responsible Britain we want to see."

Those with the most to lose: The big spending departments

Home Office

Budget 2010 £9.4bn

A 25 per cent cut (£2.35bn) would mean: Police cuts, targeted at civilian staff and community support officers first, but there will be fewer bobbies on the beat.

A 40 per cent cut (£3.8bn): A minimum of 35,000 officers lost. Plans for a border police force shelved.

Department for Communities and Local Government

Budget 2010 £29.8bn

25 per cent (£7.5bn): A quarter off the £25bn grants to local authorities – direct impact on local services.

40 per cent (£12bn): More core services suffer, including social care for the elderly.

Ministry of Justice

Budget £9.1bn

25 per cent (£2.3bn): Cut £2bn legal aid budget and £1.2bn national offender management service. Review sentencing to cut the £2.5bn prison costs.

40 per cent (£3.6bn): All prison-development plans cut. Squeeze on probation service.

Department for Business

Budget 2010 £19.2bn

25 per cent (£4.8bn): Slashed science and research budget, fewer grants for business and further education.

40 per cent (£7.7bn): Cut £1.4bn "train to gain" scheme and £1bn student-loans subsidies. Cutting student numbers – or raising fees – by a quarter raises £2.8bn.

Department for Transport

Budget 2010 £6.4bn

25 per cent (£1.6bn): Less spending on motorways and main roads and on subsidies for Network Rail. No road improvement schemes.

40 per cent (£2.5bn): No A-road upgrades or safety schemes. Higher rail fares.

Department for Work and Pensions

Budget £8.8bn

25 per cent (£2.2bn): £750m saved by closing selected Jobcentres. Similar savings from admin and computing.

40 per cent (£3.4bn): Cutting £11bn a year from £130bn benefits bill.

Figures from Coalition Budget, 2010