The Confederation of British Industry (CBI) lobby group said it agreed with plans to slash spending to avoid major tax rises.
The group called for increased use of means-testing for some universal welfare benefits and greater involvement of private firms and voluntary groups in providing welfare support.
It also urged ministers to cut the transport concessionary fares budget and Highways Agency contracts and to make schemes more cost-efficient.
The CBI said, however, that ministers should maintain spending on areas vital to economic growth such as the London Underground and the capital’s Crossrail project.
It said public sector capital investment should be returned to 2.25 per cent of GDP as soon as possible.
CBI chief economic adviser Ian McCafferty said government efficiency should be improved across the board, but planned cuts to net public sector investment were a concern.
“Cuts will necessarily affect GDP growth in the short term, but smart choices will give the economy the ability to grow,” he said.