The shadow chancellor set out a detailed range of cuts, including a one-year pay freeze for five million public sector workers, which, he said, would save the taxpayer £23 billion over the next five years.

The scale of the Tory plans to tackle the record budget deficit built up by Labour took many by surprise because it risks alienating a large swath of voters, including doctors, nurses and police officers.

But in a calculated political gamble, Mr Osborne said that he was simply being “honest” about the economic difficulties facing the country. He pleaded with the public to accept that everyone had to face up to the challenges ahead.

“We’re all in this together,” he repeatedly told Conservative supporters at the party’s conference in Manchester.

In a frank assessment, Mr Osborne gave warning that Britain was “sinking in a sea of debt”. While public sector workers would bear the brunt of cuts, middle-class families would also be asked to share the burden, he said.

Measures included:

* A one-year freeze on public sector pay from 2011 for all those earning more than £18,000, except members of the Armed Forces.

* A £50,000 cap on the maximum pension payments for senior civil servants

* Reducing the cost of Whitehall bureaucracy by a third, saving more than £3billion.

* The abolition of £250 baby bonds and tax credits for families earning over £50,000.

In addition, Mr Osborne said that the Tories would keep the Government’s proposed 50p tax on incomes over £150,000. He also

confirmed plans to increase the state pension age from 2016.

The shadow chancellor pledged to reverse Gordon Brown’s stealth tax on pension funds, but not during the life of the next Parliament.

He confirmed the intention to introduce a more generous inheritance tax allowance of £1 million, but would only say that this would be introduced at some point during the first Parliament of a Tory government.

Mr Osborne’s plans for a wide-ranging public sector pay freeze dwarfed the Government’s earlier recommendation to peg back the pay of certain highly paid public sector workers. Union leaders reacted by threatening industrial action over any attempt to deny pay rises.

Mr Osborne insisted, however, that only drastic action and “difficult decisions” could rescue the economy. “This is about character as well as policy,” he said. “Now we face the biggest challenge.

“How to build the sort of Britain we want in the face of the largest deficit in the developed world. There cannot be one rule for

Westminster and Whitehall and another rule for everyone else.”

Economists said that Mr Osborne’s plans represented the biggest series of cuts since Margaret Thatcher took power in 1979. The speech was well-received but there were few positive policy announcements to enthuse the party faithful, reflecting the grim economic circumstances an incoming Conservative administration would face.

One popular giveaway policy was a pledge to double the allowance for members of the Armed Forces serving on overseas tours to an average of £4,800.

But Mr Osborne’s announcement that he would not even consider scrapping the new 50p top level of tax for the highest earners was met with silence by many in the hall. He insisted that the party had to be “straight” with the public.

“These are the honest choices in the world in which we live and we have made them today,” he said. “Anyone who tells you these choices can be avoided is not telling you the truth. We are all in this together.”

Mr Osborne added: “A pay freeze of the scale I’m talking about is the equivalent to saving 100,000 public sector jobs. And I say to every public sector worker it is the best way to try to protect your job during this difficult period.”

He also attacked the Prime Minister for “going shopping on Brighton pier with the nation’s credit card” at last week’s Labour conference.

“The Iron Chancellor has turned into the plastic Prime Minister. Free social care. Free hospital parking. Free child care places. We would all like those things. But where is the money coming from? He is treating the British people like fools,” said Mr Osborne.

He gave warning that failure to bring down the £175billion deficit quickly would threaten Britain’s future prosperity.

“You cannot have a sustained recovery until you show the world that Britain can pay its way. And let me tell you, the world is watching Britain at the moment,” he said.