Britain’s foreign aid budget will be used to provide homes for refugees in the UK as part of a “fundamental rethink” on how the Government tackles the growing crisis, George Osborne has announced.

The Chancellor said that the aid budget should be used in a way that helps “Britain’s national interest”, not just “the rest of the world”.

David Cameron will address the Commons on Monday to provide details of exactly how Britain will increase its contribution to help refugees, Mr Osborne said. Sources within Downing Street have reportedly said the UK will offer to take “at least 10,000” – a dramatic increase on its previous commitments.

Speaking to the BBC’s Andrew Marr Show, Mr Osborne admitted that the picture of Syrian three-year-old Aylan Kurdi washed up on a beach in Turkey had “brought home to everyone the severity of the crisis”, likening it to photos of napalm victims from the Vietnam war.

“That picture brought home to the British public, and indeed politicians, the sheer horror of what’s going on,” he said.

While Mr Osborne insisted that “the policy hasn’t changed” on the refugee crisis, he said: “Britain will approach the problem with a head as well as a heart.”

“In the shorter term, we are going to take more refugees – but not in a way that encourages them on to boats. In the longer term, I think we need a fundamental rethink of the way we spend our aid budget.”

Mr Osborne said money from the overseas aid budget would be given to local councils in Britain to help them prepare for the arrival of larger numbers of refugees.

He said Britain would select people directly from refugee camps on the Syria border so as not to encourage them to make the journey themselves. He suggested preferential treatment would be given to orphans, but otherwise gave no details as to how the selection process would work.

The refugee crisis - in pictures Show all 70 1 /70 The refugee crisis - in pictures The refugee crisis - in pictures Refugees fleeing conflict A Syrian refugee holding a baby in a lifetube swims towards the shore after their dinghy deflated some 100m away before reaching the Greek island of Lesbos The refugee crisis - in pictures Refugees fleeing conflict A refugee raises a child into the air as Syrian and Afghan refugees are seen on and around a dinghy that deflated some 100m away before reaching the Greek island of Lesbos The refugee crisis - in pictures Refugees fleeing conflict Syrian and Afghan refugees fall into the sea after their dinghy deflated some 100m away before reaching the Greek island of Lesbos The refugee crisis - in pictures Refugees fleeing conflict A refugee cries as he holds a child on the Serbian side of the border with Hungary in Asotthalom Reuters The refugee crisis - in pictures Refugees fleeing conflict Refugees stand in front of a barrier at the border with Hungary near the village of Horgos, Serbia Reuters The refugee crisis - in pictures Refugees fleeing conflict A refugee from Syria prays after arriving on the shores of the Greek island of Lesbos aboard an inflatable dinghy across the Aegean Sea from from Turkey. Greece sent troops and police reinforcements to Lesbos after renewed clashes between police and migrants, the public broadcaster said, while Syrian refugees on the island were targeted with Molotov cocktail attacks The refugee crisis - in pictures Refugees fleeing conflict Police try to stop refugees going under a fence to board a train at a station near Gevgelija, Macedonia. Several thousand refugees in Macedonia boarded trains to travel north after spending a night in a provisional camp. Macedonia has organised trains twice a day to the north border where they cross into Serbia to make their way to Hungary The refugee crisis - in pictures Refugees fleeing conflict Refugees push each other as they try to board a bus following their arrival onboard the Eleftherios Venizelos passenger ship at the port of Piraeus, near Athens, Greece The refugee crisis - in pictures Refugees fleeing conflict Refugees are welcomed by locals after their arrival at the main railway station in Frankfurt, Germany. Over 1,000 more refugees arrived in Germany to cheers and "welcome" signs, but calls grew for a European solution to its worst refugee crisis since World War II The refugee crisis - in pictures Refugees fleeing conflict A young Syrian boy arrives on the Greek island of Lesbos after crossing in a dinghy with other refugees from Turkey AP The refugee crisis - in pictures Refugees fleeing conflict Refugees walk on the railway tracks between Bicske and Szar, some 40 kms west of Budapest, trying to reach Germany EPA The refugee crisis - in pictures Refugees fleeing conflict Hungarian policemen stand by the family of refugees as they wanted to run away at the railway station in the town of Bicske, Hungary The refugee crisis - in pictures Refugees fleeing conflict A family is arrested by local police after their local train coming from Budapest and heading to the Austrian border has been stopped in Bicske, west of the Hungarian capital The refugee crisis - in pictures Refugees fleeing conflict A man is arrested by local police after his local train coming from Budapest and heading to the Austrian border has been stopped in Bicske, west of the Hungarian capital The refugee crisis - in pictures Refugees fleeing conflict More than 2,500 refugees have died trying to reach Europe this year and the struggle continues as they travel through the continent Getty Images The refugee crisis - in pictures Refugees fleeing conflict Refugees protest in front of a train at Bicske railway station. Hundreds of people, were stranded on a train in Hungary for a second, demanding passage to Germany in a standoff with riot police The refugee crisis - in pictures Refugees fleeing conflict Syrian refugees arrive on the shores of Lesvos island Getty The refugee crisis - in pictures Refugees fleeing conflict Syrian refugees on the Greek Macedonian border Getty The refugee crisis - in pictures Refugees fleeing conflict Refugees storm into a train at the Keleti train station as Hungarian police withdrew from the gates after two days of blocking their entry The refugee crisis - in pictures Refugees fleeing conflict Refugees storm into a train at the Keleti train station in Budapest The refugee crisis - in pictures Refugees fleeing conflict Refugees cross the border between the Former Yugoslav Republic of Macedonia and Greece, near the town of Gevgelija, Macedonia. The Gevgelija-Presevo journey is just a part of the journey that the refugees, the vast majority of them from Syria, are forced to make along the so-called Balkan corridor, which takes them from Turkey, across Greece, Macedonia and Serbia to Hungary, the gateway to the European Union, September 2015 The refugee crisis - in pictures Refugees fleeing conflict A refugee helps up an exhausted fellow refugee as they cross the border between Macedonia and Greece, near the town of Gevgelija, September 2015 The refugee crisis - in pictures Refugees fleeing conflict People breaking through a police cordon and crossing the border between Macedonia and Greece, September 2015 The refugee crisis - in pictures Refugees fleeing conflict Refugees pass the border between Macedonia and Greece, September 2015 The refugee crisis - in pictures Refugees fleeing conflict A Macedonian policeman carries a child across the border between Macedonia and Greece, September 2015 The refugee crisis - in pictures Refugees fleeing conflict Syrians sleep on railroad tracks waiting to be processed across the Macedonian border in Idomeni, Greece, September 2015 The refugee crisis - in pictures Refugees fleeing conflict A Czech police officer marks a refugee with a number after more than than 200 refugees were detained, mostly from Syria, on trains from Hungary and Austria at the railway station in Breclav, Czech Republic, September 2015 AP Photo, CTK/Igor Zehl The refugee crisis - in pictures Refugees fleeing conflict A baby is lifted on to the Norwegian vessel ‘Siem Pilot’ during a search-and-rescue mission off the Libyan coast, September 2015 AP The refugee crisis - in pictures Refugees fleeing conflict Budapest's main international railway station ordered an evacuation as hundreds of people tried to board trains to Austria and Germany, September 2015 The refugee crisis - in pictures Refugees fleeing conflict People wave their train tickets and lift up children outside the main Eastern Railway station in Budapest, September 2015 The refugee crisis - in pictures Refugees fleeing conflict People protest at the Eastern (Keleti) railway station of Budapest, September 2015 The refugee crisis - in pictures Refugees fleeing conflict Refugee children sleep in the surrounding green area of the Keleti railway station in Budapest, September 2015 The refugee crisis - in pictures Refugees fleeing conflict Syrians cross under a fence into Hungary at the border with Serbia, near Roszke, August 2015 Reuters The refugee crisis - in pictures Refugees fleeing conflict Refugees who have just crossed the border from Serbia into Hungary walk along a railway track that joins the two countries, August 2015 Getty Images The refugee crisis - in pictures Refugees fleeing conflict Police arrest refugees at Cobham Services on the M25 in Surrey, August 2015 Twitter: @bigwheeluk The refugee crisis - in pictures Refugees fleeing conflict Men hold a boy as they are stuck between Macedonian riot police officers and fellow refugees during a clash near the border train station of Idomeni, August 2015 AFP/Getty The refugee crisis - in pictures Refugees fleeing conflict A Syrian father holds his children close as his arrives on the Greek Island of Kos, August 2015 Eyevine The refugee crisis - in pictures Refugees fleeing conflict A tourist offers water to Iranian refugees as they arrive by paddling an engineless dinghy from the Turkish coast (seen in the background) at a beach on the Greek island of Kos, August 2015 Reuters The refugee crisis - in pictures Refugees fleeing conflict A Syrian holds his 30-day-old baby on an overcrowded train as they travel through Macedonia. Tens of thousands of refugees, mainly from the Middle East and Africa, use the Balkans route to get into the European Union, passing from Greece to Macedonia and Serbia and then to western Europe, August 2015 The refugee crisis - in pictures Refugees fleeing conflict A man rests on a platform at the train station in Gevgelija, on the Macedonian-Greek border, August 2015 Getty The refugee crisis - in pictures Refugees fleeing conflict Refugees react after boarding the Migrant Offshore Aid Station (MOAS) ship MV Phoenix some 20 miles (32 kilometres) off the coast of Libya. Some 118 refugees were rescued from a rubber dinghy off Libya. The Phoenix, manned by personnel from international non-governmental organisations Medecins san Frontiere (MSF) and MOAS, is the first privately funded vessel to operate in the Mediterranean, August 2015 The refugee crisis - in pictures Refugees fleeing conflict Authorities are being overwhelmed as they try to fight off hundreds of refugees, prompting France to beef up its police presence, July 2015 AFP The refugee crisis - in pictures Refugees fleeing conflict People escape from the French Police as they try to catch a train to reach England, July 2015 EPA The refugee crisis - in pictures Refugees fleeing conflict A man jumps over a fence as he attempts to access the Channel Tunnel, in Calais, northern France, July 2015 PA/Thibault Camus The refugee crisis - in pictures Refugees fleeing conflict Two men cling to the roof of a freight truck as it leaves the Eurotunnel terminal in Folkestone, July 2015 Getty The refugee crisis - in pictures Refugees fleeing conflict A man climbs a security fence of a Eurotunnel terminal in Coquelles near Calais, July 2015 The refugee crisis - in pictures Refugees fleeing conflict Men help a man squeeze through a gap in a fence near the Eurotunnel terminal in Coquelles in Calais, July 2015 Getty The refugee crisis - in pictures Refugees fleeing conflict Desperate for entry to the EU, the group of people risked being washed away by the sea at Ventimiglia rocks, June 2015 The refugee crisis - in pictures Refugees fleeing conflict Stranded refugees spend night on rocks - they were supplied with emergency blankets after a cold night next to the sea, June 2015 The refugee crisis - in pictures Refugees fleeing conflict Refugees climb in the back of a lorry on the A16 highway leading to the Eurotunnel in Calais, June 2015 Getty Images The refugee crisis - in pictures Refugees fleeing conflict A police officer sprays tear gas to men trying to access the Channel Tunnel on the A16 highway in Calais, northern France, June 2015 PHILIPPE HUGUEN/AFP/Getty Images The refugee crisis - in pictures Refugees fleeing conflict Men jump out of a lorry after being discovered by French gendarmerie officers, June 2015 AP The refugee crisis - in pictures Refugees fleeing conflict A man sits under the trailer of a lorry, June 2015 AP The refugee crisis - in pictures Refugees fleeing conflict A Belgian navy sailor passes life vests to refugees sitting in a rubber boat as they approach the Belgian Navy Vessel Godetia, June 2015 AP The refugee crisis - in pictures Refugees fleeing conflict People on the Belgian Navy vessel Godetia after they were saved during a search and rescue mission in the Mediterranean off the Libyan coast, June 2015 AP The refugee crisis - in pictures Refugees fleeing conflict Iraqis wait as they are detained by Hungarian police after crossing the Hungarian-Serbian border illegally near the village of Asotthalom, Hungary, June 2015 Reuters The refugee crisis - in pictures Refugees fleeing conflict Syrian refugees walking on train tracks through Macedonia on the Western Balkans migration route, after entering Europe through Greece, June 2015 Reuters The refugee crisis - in pictures Refugees fleeing conflict A group of people huddle together during an operation to remove them from the Italian-French border in the Italian city of Ventimiglia. Italy and France engaged in a war of words as a standoff over hundreds of Africans offered a graphic illustration of Europe's migration crisis. Italian Interior Minister Angelino Alfano described images of refugees perched on rocks at the border town of Ventimiglia after being refused entry to France as a "punch in the face for Europe", June 2015 The refugee crisis - in pictures Refugees fleeing conflict A man is carried by Italian police in Ventimiglia, Italy. Police reportedly removed refugees from under a railway bridge, June 2015 EPA The refugee crisis - in pictures Refugees fleeing conflict People queue after disembarking from the Royal Navy ship HMS 'Bulwark' upon their arrival in the port of Catania on the coast of Sicily, June 2015 GIOVANNI ISOLINO/AFP/Getty Images The refugee crisis - in pictures Refugees fleeing conflict A Syrian child holds a drawing as he waits to disembark from Belgian Navy vessel Godetia at the Augusta port, Italy. Around 250 refugees from Syria arrived at the Sicilian harbour from a Damascus refugee camp, June 2015 The refugee crisis - in pictures Refugees fleeing conflict A dinghy overcrowded with Afghan refugees arrived on a beach on the Greek island of Kos, May 2015 The refugee crisis - in pictures Refugees fleeing conflict An Afghan child is helped off a rib on the Greek island of Kos, May 2015 The refugee crisis - in pictures Refugees fleeing conflict An Afghan girl holds the hand of a woman as they arrive on a beach on the Greek island of Kos, after crossing a part of the Aegean Sea between Turkey and Greece, May 2015 The refugee crisis - in pictures Refugees fleeing conflict Refugees crossed part of the Aegean Sea between Turkey and Greece, May 2015 The refugee crisis - in pictures Refugees fleeing conflict Afghan refugees arrive on a beach of Kos, May 2015 The refugee crisis - in pictures Refugees fleeing conflict Rescuers help children to disembark in the Sicilian harbor of Pozzallo, Italy in April 2015 The refugee crisis - in pictures Refugees fleeing conflict A boat transporting refugees arrives in the port of Messina after a rescue operation at sea, April 2015 Getty The refugee crisis - in pictures Refugees fleeing conflict Armed Forces of Malta personnel in protective clothing carry the body of a dead man off Italian coastguard ship Bruno Gregoretti as surviving refugees watch in Senglea, in Valletta's Grand Harbour, April 2015 The refugee crisis - in pictures Refugees fleeing conflict Rescued people talk to a member of the Malta Order after a fishing boat carrying refugees capsized off the Libyan coast, is brought ashore along with 23 others retreived by the Italian Coast Guard vessel Bruno Gregoretti at Boiler Wharf, Senglea in Malta, April 2015

“We are trying to deter criminal gangs rather than provide a magnet,” he said. “We don’t want to say to people that you can only have a home in Britain if you have made that dangerous journey across the Mediterranean.”

Mr Osborne also said that more of Britain’s aid budget would go towards improving conditions on the camps bordering conflict zones “to keep them there and house them there”.