Ministers are to signal a tougher approach to incapacity benefit this week as the next stage of its welfare reforms, by reducing the benefit levels of those tested if they are found capable of doing some work.

Details are expected to be announced by the work minister, Chris Grayling, this week. Early pilots suggest half of those assessed are being taken off the higher rate benefit on the basis that tests reveal they are fit to do some work, government sources say.

Those deemed capable are likely to be required to do more to make themselves available for work if they are to continue receiving benefit.

Ministers have also looked at whether they can speed up the testing, but denied a suggestion that they could treble the number tested.

The chancellor, George Osborne, signalled tonight that efforts to take more of those on incapacity benefit off welfare will form a significant part of plans to cut the deficit, saying: “It’s a choice we all face. It is not a choice we can duck.”

Osborne said the trade-off between cutting the £192bn welfare bill and the level of spending cuts required in other government departments will be a central feature of the first meeting this week of his pivotal cabinet committee on public spending.

Ministers are looking to see whether existing incapacity benefit claimants can be passed to new private sector welfare-to-work providers.

Osborne, speaking in Toronto at the G20 summit, said: “Some of these benefits individually are very much larger than most government departments. Housing benefit is one of the largest. In its own right, it would be treated as one of the largest government departments.

“Incapacity benefit and employment and support allowance is a very large budget. We have got to look at all these things, make sure we do it in a way that protects those with genuine needs, those with disabilities, protects those who can’t work but also encourages those who can work into work”.

Previous attempts to cut back on the cost of funding incapacity benefit, now claimed by around 2.6 million people, met with major criticism. A new system introduced by the last government to assess whether or not the sick and disabled were capable of working wrongly found seriously ill people ready to work, according to a report in March by the Citizens Advice Bureau. People with advanced Parkinson’s Disease or Multiple Sclerosis, with severe mental illness, or awaiting open heart surgery were registered as fit to work, it said.

The need to reduce the welfare bill has been intensified by renewed commitments by David Cameron and Osborne this weekend to press ahead with real terms increases in the NHS budget, as well as not cut pensioners’ winter fuel allowance.

Osborne has said he will need 25% cuts in departmental spending outside the NHS and international aid if he is to eradicate the current structural deficit by the end of the parliament. Osborne said: “We have given some very specific commitments on some benefits, we haven’t given specific commitments on others, and that’s what I want to be part of the spending review over the summer.”

Faced by renewed calls from the former chancellor Lord Lawson to stop ringfencing the NHS budget, he said: “We have committed to real term increases in the health budget for a good reason. There are very significant demographic pressures on the health service which have to be taken into account.”

But despite such assurances doctors’ leaders warned tonight that the economic crisis could have “devastating” consequences for the NHS.

The British Medical Association has warned redundancies, recruitment freezes and service cutbacks are the “early signs of the impact of the economic crisis” on the NHS. The BMA said 72% of 92 doctors surveyed said their health trust had postponed or cancelled clinical service developments because of financial pressures.

Lawson also defended plans by the work and pensions secretary, Iain Duncan Smith, to cut the housing benefit budget. He said Duncan Smith was dealing with “very legitimate concerns” about “the ability of people to move within the social housing sector”. Duncan Smith had never suggested the unemployed should “get on their bike” to find work, in an echo of the notorious phrase used by Lord Tebbit in the 1980s.

He also disclosed yesterday that he had “fought long and hard” to prevent benefits being frozen in the budget, and ensure they were uprated.

But Labour’s Ed Balls accused the government of wanting to force people out of their homes, and the shadow housing minister, John Healey, said the test would be whether the Conservatives build social housing to help council tenants move home, or instead use it as a punitive policy. The Labour government had introduced move-to-work schemes, but their impact was limited by the lack of affordable social housing, he said.

In an interview in the Sunday Telegraph, Duncan Smith said he wanted to make it easier for the long-term unemployed to move to areas where they could find work by changing the rules relating to council tenancy. “The middle class do this all the time,” he said. “You have a house, if you have to move work, you use that as a portable asset … Why is it that for a group of people on low incomes, we leave them trapped, rather than give them the same portability?” Duncan Smith made it clear he was not talking about forcing people to move to high-employment areas. But he said he wanted to deal with “under-occupation” of council homes, that there were “tons of elderly people living in houses that they cannot run” and that he wanted councils to encourage people in this position to move into smaller properties.

Balls accused the government of wanting to evict the poor from their homes.

“[Duncan Smith] is saying to people in high employment areas which are more affluent, if you are living in social housing, he is saying ‘we are going to get you out of your homes to make space’. He goes further than ‘on your bike’. It is actually ‘on your bike and lose your home’.”

The Department for Work and Pensions was unable to give details of how Duncan Smith’s proposals would be implemented. But Grant Shapps, the housing minister, said he wanted to take forward the plan in the Tory manifesto to allow tenants in social housing to swap with those in other parts of the country.