But he also said that the UK is planning counter cyber war against IS, which will take down its its web sites and communications.
Speaking at security agency GCHQ, Osborne said that it will defend the UK, but will also take the fight to the jihadists.
He said the IS had not yet used cyber warfare to kill people but that the UK government knew that they are building their capabilities up.
The government will double spending on cyber security to close to £2 billion.
He said if electricity, air traffic control or hospitals were attacked online, the damage would not be limited to economic loss, but lives would be lost.
The government will base the team at GCHQ in Cheltenham.