Departments could face cuts of up to 40 per cent

Chancellor George Osborne has ordered Government departments to draw up plans for spending cuts of up to 40 per cent - slashing services and axing hundreds of thousands of jobs.

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.

The Office for Budget Responsibility 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 per cent over the next four years - apart from health and overseas aid whose budgets were ring-fenced.

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 per cent and 20 per cent would have.

The rest of Whitehall was told to prepare plans for cuts of 25 per cent and 40 per cent.