The Tory minister will make the drastic claim in the first ever speech by a Chancellor at spy base GCHQ, where he will unveil a £1.9bn spending boost for online security by 2020.
The pledge – which comes as he slashes other Whitehall departments by 21% – will help pay for 1,900 new spies and a new National Cyber Centre at the Cheltenham base to target hackers.
Speaking days after terrorists massacred 129 people in Paris, he will warn: “The stakes could hardly be higher.
“If our electricity supply, or our air traffic control, or our hospitals were successfully attacked online, the impact could be measured not just in terms of economic damage but of lives lost.”
The Chancellor is set to say ISIS, also called ISIL or Islamic State, are using the internet for ‘evil’ while most people use it to boost creativity and make the world a better place.
He will add: “Let’s be clear. Isil are already using the internet for hideous propaganda purposes; for radicalisation, for operational planning too.
“George Osborne will make the dire warning today in a speech at GCHQ, amid claims jihadis could try to take control of air traffic control systems and hospitals.
“They have not been able to use it to kill people yet by attacking our infrastructure through cyber attack.
“They do not yet have that capability. But we know they want it, and are doing their best to build it.
“So when we talk about tackling ISIL, that means tackling their cyber threat as well as the threat of their guns, bombs and knives.”
Home Secretary Theresa May confirmed yesterday 1,900 new officers will be recruited to spy agencies MI5, MI6 and GCHQ.
But she faced pleas from Labour and Tory mayoral candidate Zac Goldsmith not to press ahead with drastic cuts to neighbourhood police – the first line of defence against terror.
Shadow Home Secretary Andy Burnham said: “They have been talking about 25% cuts to the police budget.
“Can she assure the House today that both she and the Chancellor will revisit those assumptions about the police budget in the light of what has happened and ensure police have the funding they need to do the job?”
Today the Chancellor will reveal he has agreed 21% spending cuts by 2020 with seven Whitehall departments, including the Department for Work and Pensions and tax collectors HMRC.
But crucially he has not revealed what cuts will be faced by the Home Office as chiefs make last-minute tweaks to the police budget.
The £1.9bn spending boost will also strengthen the government’s Active Defence Programme to look at whether officials can help internet service providers to divert more viruses.
There will be a ‘renewed crackdown on cyber-criminals’ with added powers for the National Cyber Crime Unit.
A new Institute for Coding will be set up to train ‘the nation’s next generation of coders’, while a new Cyber Skills Programme will give after-school mentoring sessions to talented youngsters.
New cyber apprenticeships will look at protecting key sectors including finance and energy, and a Cyber Innovation Centre will offer to host start-up firms at the Cheltenham spy base to learn from their expertise.