The Chancellor said an Office for Budget Responsibility (OBR) forecast that Government spending on goods and services was expected to reach its lowest level as a proportion of domestic product since records began in 1948 did not take into account further cuts to benefits.
In order to spare further swingeing cuts to Whitehall budgets, and to protect investment in schools and science, there would have to be a focus on reducing the amount spent on welfare.
Responding to the OBR's projection of 1948-levels of spending, Mr Osborne told MPs: "I think that assumption is based on what I think is an erroneous judgment ... about what the political system will do.
"They are perfectly right that on the current plans that's what it shows.
"But I think the next government will want to undertake further reductions in the welfare budget and further welfare savings.
"If you undertake further welfare savings then you don't reach that 1948 number."
He added: "I think as an important part of the consolidation that remains to take place we need further welfare savings.
"I don't think all the savings need and should be made within the departments.
"I think we should make a balanced judgment about where government spends its money and, yes, we have got to make difficult decisions to save money further in Whitehall but we should accompany that with savings in the welfare budget."