Osborne - The cost-cutting starts now (with video)

Mr Osborne said that he would also be setting out next week details of the 6 billion of spending cuts to be made this year.

Speaking at the Treasury with new Liberal Democrat Treasury Chief Secretary David Laws alongside him, Mr Osborne warned that failure to tackle the UK's record deficit would be "disastrous".

Mr Osborne said that he and Mr Laws were agreed that the cuts this year were achievable without affecting frontline public services.

He said that the "great majority" of the savings would be used to start paying down the deficit.

"It is the clear view of the Treasury and the Governor of the Bank of England that these are necessary actions to ensure stability and secure the recovery," he said.

"The Treasury's assessment is that there is a strong economic case for an immediate spending reduction of 6 billion. So we are in no doubt that this action is advisable.

"By tackling wasteful spending now rather than later, we can demonstrate our commitment to tackling the deficit."

Mr Osborne confirmed plans to hand over responsibility for setting the forecasts for economic growth and government borrowing - on which the Budget calculations are based - to the newly created Office for Budget Responsibility under Sir Alan Budd.

"Again and again, the temptation to fiddle the figures, to nudge up a growth forecast here or reduce a borrowing number there, to make the numbers add up has proved too great, and that is a significant part of the reason for our current problems," he said.

"I am the first Chancellor to remove the temptation to fiddle figures by giving up control of the economic and fiscal forecasts. I recognise that this will create a rod for my back down the line.

"That is the whole point. We need to fix the Budget to fit the figures, not fix the figures to fit the Budget."

Mr Osborne said that tackling the deficit was the "most urgent issue" facing the Lib-Con coalition.

He warned that failure to get to grips with the problem could lead to the sort of problems now afflicting Greece.

"This is the legacy of thirteen years of fiscal irresponsibility. And it poses a very real threat to the recovery," he said.

"Greece is a reminder of what happens when governments lack the willingness to act decisively and quickly, and when problems are swept under the carpet.

"If we fail to tackle the deficit we inherited from the previous government, the consequences could be disastrous."

Mr Laws said every new spending commitment and pilot project signed off by Labour ministers since the turn of the year would be individually reviewed in a bid to find savings "in addition" to the 6bn target.

"We will want to test in each and every case whether these are affordable, whether they deliver value for money and whether they remain genuine priorities for the new Government," he said.

"Each minister will review approvals given by their predecessor and those requiring Treasury approval will have to be resubmitted."

Any projects which failed the test would be halted, he indicated, but insisted there would be no "blanket cancellation".

"This is simply due diligence by the new coalition government in relation to some of the irresponsible decisions we have inherited."

The Chief Secretary said he had already rejected some suggested cuts which he believed would have damaged frontline services.

"I have, and I will reject any proposals which would damage key services or put at risk those on lower incomes," he said.

Sir Alan said the work of the OBR began on Thursday and was going "very well".

The three-man Budget Responsibility Committee he is heading would not claim to be able to get all the forecasts right - which was impossible, he suggested.

"But every judgment will be ours and we guarantee the indepedence and integrity of our work," he said.

The other two members of the committee are economist Geoffrey Dicks and retired senior Treasury official Graham Parker.

Praising what was described as a "small secretariat" of officials drawn from with the Treasury, Sir Alan said: "I am delighted that I already hear them talk about 'The Treasury' as if it were some other institution whose work we should be scrutinising and challenging."

TUC general secretary Brendan Barber said: "With the economy so fragile and thousands still losing jobs, the Government needs to avoid rushing into a round of cuts.

"If the economy suffers as a result of decisions taken ahead of the emergency Budget, tax revenues will fall and the deficit will only get worse. This is not a time to wield the axe without very careful consideration of the wider consequences."

Sir Alan's team will also instigate an immediate independent audit of Government spending after ministers claimed they had found "black holes" in Labour budgets.

"We urgently need a full, independent, assessment of how bad the problem is, "Mr Osborne said - indicating it would be published ahead of the emergency Budget.

"Everyone will be able to see the scale of the problem to which the Budget must provide the solution," he added.

The team would be given "full access" to all Treasury data, assumption and models as well as analysis of liabilities, such as PFI projects and pensions.

The Chancellor would not be drawn on the prospects of a rise in VAT in the emergency Budget - declining to add to comments by Prime Minister David Cameron yesterday that it was "not something we plan to do".

"We've said what we've said on VAT. We are in the approach to the Budget and I am not going to start commenting on individual taxes."

He said his aim that 80% of savings should come from spending and 20% from tax rises remained a "broad rule of thumb" - although the Liberal Democrats have secured agreement that some of this year's 6 billion should be spent on boosting the recovery.

And he defended plans to increase Capital Gains Tax on non-business assets, saying there was "an enormous amount of income shifting" happening by people looking to avoid paying income tax.

Mr Laws denied that his party had abandoned a key plank of its economic manifesto by accepting the need for 6bn of spending reductions this year.

"What's changed our minds is not only the compromises you have to make if you are working in a coalition...but also the clear advice we have received from the Bank of England and the Treasury itself that it would be responsible and safe to make these adjustments without risking the economic recovery which is under way," he said.

But trade unions warned against rapid cuts.

TUC General Secretary Brendan Barber said: "With the economy so fragile and thousands still losing jobs, the Government needs to avoid rushing into a round of cuts.

"If the economy suffers as a result of decisions taken ahead of the emergency Budget, tax revenues will fall and the deficit will only get worse.

"This is not a time to wield the axe without very careful consideration of the wider consequences."

Institute of Directors spokesman Alistair Tebbit said: "We very much welcome early indications from the Government that it will press ahead with cuts to public sector spending sooner rather than later.

"We look forward to seeing more detail on this in the emergency Budget.

"The Lib-Con coalition is right to ignore those siren voices which are still saying that early cuts would jeopardise recovery.

"We have argued throughout that provided fiscal tightening is based on lower public spending and not higher taxation, tightening will be good for growth and will actually help kickstart the recovery."