Institute for Fiscal Studies warns public spending reductions could reduce quality of some services to such an extent chancellor may have to review cuts

George Osborne said today there was no "plan B" if the speed and scale of his deficit reduction programme poses problems in the future as he stood firm by the "hard but fair choices" unveiled in the spending review.

The Institute for Fiscal Services has warned that the public spending reductions could "reduce the quantity and quality of some public services" to such an extent that the chancellor may want to put some of the money back in and urged him to review his programme after two years.

Osborne announced sweeping cuts to welfare, higher education, social housing, policing and local government that will axe £81bn from government spending and draw the country back "from the brink of bankruptcy".

The most striking of the new cuts announced yesterday was a package of £7bn in extra welfare cuts on top of the £11bn already made in the last budget. This will include the withdrawal of £50 a week from the 1 million people who have been claiming incapacity benefit for more than a year.

Housing charities have also warned of the prospect of rising homelessness among the young as a result of changes to housing benefit rules.

Osborne admitted that his budget was a "hard road to follow" but promised a brighter future at the end.

Labour however denounced the government's "slash and burn" strategy while the IFS said his measures were "regressive", hitting the poor harder than the rich.

Today, the chancellor cited the backing of the International Monetary Fund and big business to underline his conviction in his decisions.

Pressed on what he would do if his strategy proved to have devastating consequences, Osborne made clear he intended to stay on course.

Speaking to BBC Radio 4's Today programme, he said: "People in the Labour party keep saying: 'Where's your plan B?' I've got a plan A ... This country didn't have any plan at all in a few months ago. We have got the plan. We have got some fiscal credibility out there in the world. We've created a platform for economic stability, dealt with this huge budget deficit problem with a measured plan that takes place over four years."

He added: "Yes, some people on the Labour side say that I am going too far but I believe what I am doing commands the support not just of bodies like the IMF but also businesses who are going to create that private sector recovery that we want to encourage."

He said that he had made a deliberate decision to cut benefits, such as housing benefit for single young people, rather than frontline services.

"I have made a conscious choice. I have decided to try to sustain spending on the national health service, on our schools, on some of the important infrastructure like our roads and green energy," he said.

"I have chosen, in part, to pay for that, as part of the deficit reduction plan, by trying to curb the rise in the benefits bill. That has involved some hard choices but I think they are fair choices.

"If we don't deal with the rapid rise in things like the housing benefit bill, which is now greatly more than we spend on the police, then we will have a real problem."

He rejected the suggestion that Britain faced rising homelessness as a result of housing benefit cuts as he insisted that the principle that a welfare system that incentivises people to work to earn more money than they could possibly earn on benefits was "perfectly reasonable".

"I wish I was not doing this against the backdrop of the enormous budget deficit, but these are the cards I have been dealt by my predecessor and I am dealing with it," he said.

And he defended the decision to maintain universal benefits for the elderly, such as free bus passes, regardless of their income brackets, because he said means testing would have ended up being too costly.

Carl Emmerson, the acting director of the IFS, said that the public finances "often do not behave as expected" in response to government efforts to pull economic levers, and that a review after two years would be sensible.

"There are two key downside risks to this deficit reduction plan," Emmerson said. "First, the structural budget deficit could turn out to be larger than the Office for Budget Responsibility's central estimate. Back in June, the OBR gave the government about a six-in-10 chance of meeting its fiscal target without further policy action, so it is quite possible that further tax rises or deeper spending cuts might prove necessary.

"Second, the deep cuts to spending announced in the spending review will reduce the quantity and quality of some public services.

"Should this deterioration prove too great for the government's liking then the chancellor might wish to top up his spending plans. A review of these spending plans in two years' time would be a sensible move."

Emmerson said the chancellor's plans implied the deepest cuts since the 1970s after Britain was bailed out by the International Monetary Fund.

He warned that the plans would hit the poor hardest: "The benefit cuts ... on average will impact those in the bottom half of the income distribution more than the top half of the income distribution. Therefore, they are regressive.

"And the public service cuts, it's hard to know who loses from that, but the Treasury's best estimate ... again suggests that the bottom half will lose more than the top half. So the new stuff we heard about overall does look regressive."

Osborne insisted that people would understand that the alternative to his plans was economic ruin. "Yes, it is a hard road to follow, but it leads to a brighter future and if we don't follow this road, then I think people understand it would lead to economic ruin," he told ITV's Daybreak.

Alan Johnson, the shadow chancellor, said that Osborne's budget was a return to what people expected from the Tories.

He told the Today programme: "What most people saw yesterday from a budget that is increasingly being shown to be unfair as well as unwise and even untruthful in respect of some of the statistics, is a return to what they expect from the Conservative party. We believe the way we bring down the deficit needs to be steady, needs to be sure. This slash and burn approach is something we wouldn't do."