Mr Osborne published legislation to replace the Civil List and other grants with a single Sovereign Support Grant. The Sovereign Grant Bill was agreed with the Queen, he said.
Until now, only limited aspects of the Royal finances have been open to audit. The Sovereign Grant accounts will be scrutinised by the National Audit Office, the public spending watchdog. Its findings will be made public and examined in detail by MPs on the public accounts committee.
They will then be able to summon Royal officials and ask them to justify spending on travel, housing, entertainment and other items by members of the Royal family who receive public money. The Treasury said the system would make the Royal household "subject to the same audit scrutiny as any government department".
Jacob Rees-Mogg, a Conservative MP, warned that the plans could undermine the Royal family.
"When we say we want 'a good value monarchy', it makes Her Majesty sound like she's something to be bought off the shop shelf at Tesco. This really cannot be the way to approach our constitution," he said.
Edward Leigh, a Conservative former chairman of the Commons' public accounts committee, said the rules would mean intense scrutiny of "all aspects" of Royal finances. "It will be tough for the Royal household, there's no doubt about that,"
he said, adding: "That's what we're about, we're about accountability. And I think they've got absolutely nothing to fear."
Mr Osborne insisted the new system would provide "appropriate resources for the Queen to do her job with dignity, but balances this with fairness and accountability for the taxpayer".
From 2013, in place of the Civil List and various "grants in aid", the Royal family will receive 15 per cent of the annual surplus from the Crown Estate, a property portfolio owned by the nation.
The value of that share will fluctuate, but Mr Osborne said that in its early years, the new system would provide "around £35 million" a year.
Mr Osborne said that, allowing for inflation, the Queen faced a nine per cent cut in her income by 2015. However, there were claims that in future, the Queen would receive a significant increase in her income. The Crown Estate has a target for an annual surplus of £250 million, which would give her £37.5 million.
Ed Balls, the shadow chancellor, suggested that under the "generous" new rules, the Queen would over time enjoy real rises in her income.
However, the Bill will give senior ministers and royal officials the power to limit increases in the Sovereign Grant, saving any "excess" and using it to reduce payments in future years.
Mr Osborne told MPs that the mechanism would ensure that the Royal household's income would not rise excessively. "Basically they will do as well as the economy is doing," he said.
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