Plans for new schools and hospitals are to be slashed under a review of all capital spending planned by George Osborne, the chancellor, which is expected to direct scarce resources to projects that can show the most economic benefits, such as transport schemes.

Under Mr Osborne’s “zero-based” approach, the Treasury is starting with a blank sheet of paper, meaning every project, including some already in the pipeline, will face scrutiny. Only capital projects that clear a newly defined benchmark for a good return will be approved.

With gross public sector investment, which includes depreciation, set to fall from £69bn ($105bn) to £46bn by 2014-15 – in line with Labour’s projected cuts – Mr Osborne has told cabinet colleagues to rank every project according to a strict cost-benefit analysis. Net investment is set to fall from £49bn last year to £21bn.

“This type of analysis has happened before,” said one government official. “But this is totally different – it is a fundamental reappraisal of every capital project.”

The purge of capital spending is being run alongside the exercise that has seen most ministers being asked to prepare two models for cuts in departmental budgets of either 25 per cent or 40 per cent.

Transport projects are expected to fare relatively well, since they can most easily be shown to have a positive effect on Britain’s economic potential, but from a much smaller overall capital budget.

Philip Hammond, transport secretary, warned on Sunday that many new roads would not be built and that the focus would be on relieving bottlenecks and addressing the backlog in essential maintenance.

One transport department official said: “On a purely cost-benefit basis, we would expect to get 90 per cent of the capital budget. Of course, that won’t happen, because this is political and everyone has to have their prizes.”

Ministers concede that plans for new schools, hospitals, libraries and other public buildings could fare the worst, not least since many were renewed during Labour’s 13 years in power.

The only special case is the Ministry of Defence. While the Treasury says overall capital spending will fall by 40 per cent, Liam Fox, defence secretary, has been asked to identify two different models for cuts: for either 10 per cent or 20 per cent.

Treasury officials deny that the MoD is getting off lightly, pointing out that it cannot afford its existing procurement commitments and that a further capital budget cut would be tough. “They are already massively over-committed,” said one.

A big squeeze in defence orders could hit high-profile projects. Defence officials have speculated that the planned purchase of 150 Joint Strike Fighters could be scaled back by up to two-thirds, while the second of two new aircraft carriers could be downgraded to an amphibious assault vessel.

Mr Osborne made a play in his Budget last month of the need to maintain investment in the country’s infrastructure, but by accepting Labour’s capital plans he has set in train a period of sharp retrenchment.

“We will still make careful choices about how that capital is spent,” Mr Osborne said. “The absolute priority will be projects with a significant economic return to the country.”

The exercise could throw up awkward questions. When the Treasury asked Sir Rod Eddington to review transport projects, he came down against high-speed rail – now the coalition’s flagship policy.

Copyright The Financial Times Limited 2018. All rights reserved.

Comments have not been enabled for this article.