The chancellor has asked Sir Alan Budd, a former economic adviser to the Treasury, to head up the Office for Budget Responsibility, which will publish the review.
Budd will also be charged with producing a new set of economic growth forecasts, amid concerns that the existing ones are artificially high.
In an interview before the election, Osborne told City A.M. the audit would also quantify the liabilities from public sector pensions, the private finance initiative and Network Rail.
David Cameron, who announced the “proper, independent audit” of government finances yesterday, warned that the findings would make for uncomfortable reading.
“What we’ve seen so far are individual examples of very bad practice, spending decisions taken in the last years of the Labour government that no rational government would have taken,” he said.
Meanwhile, Cameron defended plans to introduce a new higher rate of capital gains tax (CGT), despite growing anger in the City.
The proposals, which would see capital gains taxed at a similar rate to income, would see CGT jump from 18 per cent to 40 per cent for some gains.
Cameron said: “I think everyone recognises there is a problem when you have a CGT rate of 18 per cent and a top rate of income tax of 50 per cent. You’ll find people finding all sorts of ways of treating income as capital gains.”
However he pointed out there would be generous allowances for business assets that would help “light the flames of entrepreneurialism”.
“What we’ve said is there’s a very big difference between the capital gains that someone pays on a second home, which is not necessarily a splendid investment for the whole economy, and business assets,” he added.
Previously, Osborne described plans to hike CGT – a much-cherished Lib Dem policy masterminded by Vince Cable – as “punitive”, saying they would “drive away entrepreneurial activity and wealth creation”.