Rifts at the heart of the coalition Government have been laid bare as Chancellor George Osborne set out plans for a "permanently smaller" welfare system, with a further £25 billion slashed off state spending - including £12 billion of new cuts to benefits following next year's general election.
Deputy Prime Minister Nick Clegg said Conservatives were making a "monumental mistake" by imposing "cuts for cuts' sake" and trying to place all the burden of deficit reduction on the working-age poor.
Labour said Mr Osborne was focusing on future cuts as a smokescreen to divert attention from the "cost-of-living crisis" and the Government's failure to eliminate the deficit as planned.
But Mr Osborne said substantial benefit cuts were needed to "finish the job" of balancing Britain's books while avoiding increases in tax.
After a string of positive economic figures on growth, jobs and business confidence, the Chancellor said there was "a real sense that Britain is on the rise". But he warned that 2014 was "the year of hard truths" and that easing up on austerity would mean "squander(ing) what we've achieved and go(ing) back to economic ruin".
Throwing down the gauntlet to Labour and the Liberal Democrats to make clear whether they will back further cuts in the 2015 election campaign, Mr Osborne said he would be putting his economic plans to a vote in the House of Commons later this year.
In the first major political speech of the New Year, Mr Osborne said: "Thanks to the hard work of the British people, our economy is on the mend - and our country is doing better.
"But what was hard won can be easily lost. So we have a choice in 2014. We can give up, go back to square one, risk everything.
"Or we can confront the hard truth that more difficult decisions are needed - and work through the plan that is turning Britain around.
"I say 'Let's finish the job'."
Mr Osborne' s speech came a day after Prime Minister David Cameron promised that a majority Conservative government would maintain the "triple lock" protection for state pensions.
But the Chancellor made clear that, by contrast, deep cuts can be expected in the rest of the welfare system.
"Welfare cannot be protected from further substantial cuts," said the Chancellor.
"I can tell you today that, on the Treasury's current forecasts, £12 billion of further welfare cuts are needed in the first two years of the next Parliament.
"That's how to reduce the deficit without even faster cuts to Government departments, or big tax rises on people."
Speaking at a Birmingham car parts company, Mr Osborne said the only way to ensure future jobs and prosperity was by reining in state spending on a permanent basis.
"If 2014 is a year of hard truths for our country, then it starts with this one: Britain should never return to the levels of spending of the last government," he said.
"We'd either have to return borrowing to the dangerous levels that threatened our stability, or we'd have to raise taxes so much we'd put our country out of business.
"Government is going to have to be permanently smaller - and so too is the welfare system."
As a result of "painful" cuts, the deficit was down by one third since the 2010 election, said Mr Osborne.
"That's the good news," he said. "The bad news is: there's still a long way to go. We're borrowing around £100 billion a year - and paying half that money a year in interest just to service our debts.
"We've got to make more cuts: £17 billion this coming year, £20 billion next year. And over £25 billion further across the two years after. That's more than £60 billion in total."
Speaking to BBC Radio 4's Today programme ahead of his speech, Mr Osborne played down the prospect of saving money by means-testing handouts for pensioners, and said he would instead be looking at housing benefit for the under-25s and the provision of council housing to people earning £60,000 or more.
Mr Clegg said the Chancellor's intervention revealed a "very different vision" for Britain's economy from that favoured by Liberal Democrats.
"On the right, you've got a Conservative Party now who are driven, it seems to me, by two very clear ideological impulses," the Lib Dem leader told a Westminster press conference.
"One is to remorselessly pare back the state, for ideological reasons just cut back the state. Secondly, and I think they are making a monumental mistake in doing so, they have said that the only section of society which will bear the burden of further fiscal consolidation are the working-age poor - those dependent on welfare.
"You've got an agenda on the right which appears to believe in cuts for cuts' sake, and an agenda on the left which believes in spending for spending's sake."
Shadow chancellor Ed Balls said Mr Osborne was "desperate to stop talking about the cost-of-living crisis on his watch" and would not admit that he was being forced into further cuts by low growth and his failure to balance the books by 2015.
"This failure means Labour will have to make cuts and in 2015/16 there will be no more borrowing for day-to-day spending," said Mr Balls. "But we will get the deficit down in a fair way, not give tax cuts to millionaires. And we know that the way to mitigate the scale of the cuts needed is to earn and grow our way to higher living standards for all."
TUC general secretary Frances O'Grady said: "Public spending cuts of the magnitude proposed by George Osborne would cause real pain to hard-working people... Three-quarters of the welfare cuts already announced have fallen on working people, and further cuts will simply prolong the living standards crisis."
Unite general secretary Len McCluskey described the Chancellor's approach as "an unprecedented ideological attack on the state with Britain's young people on the front line", while Public and Commercial Services union general secretary Mark Serwotka said: "This vision of a run-down welfare state, where more families will be driven into poverty and made homeless, is a bleak start to 2014."
CBI director-general John Cridland said the Government's approach was "beginning to reap some positive results", but added: "There is still much more to do. As the Chancellor highlights, only by helping businesses to grow will we be able to pay down our national debt while creating jobs and raising living standards."
Mr Clegg said: "There is not a serious economist around who believes that fiscal consolidation should take place from cuts to welfare alone, which is the Conservative approach.
"I literally don't know of a serious economist who believes that you only do it (with) that lopsided, unbalanced approach.
"Almost all serious economists say you have some kind of mix. The vast majority of economists say more of it should be composed of public spending savings than taxation but taxation should play a role.
"Whether it is 80-20, 75-25, you can dance on the head of a pin on that one but that kind of territory is where I think most people accept that you strike the right note economically and socially.
"The Conservative Party is now out on an ideological limb, almost unique in developed economies, in saying we are not going to ask people of very great wealth, very high incomes making any additional contributions to the tax system at all but only ask people with narrower shoulders to make further sacrifices to finish the job."
Mr Balls indicated that Labour was likely to match the Tory pledge on the state pension triple lock, which guarantees that pensions will rise in line with inflation or average earnings or by 2.5%, whichever is the higher.
The shadow chancellor told BBC Radio 4's World at One: "We have backed the triple lock all through this Parliament... we will wait to see what George Osborne commits to in his Budget.
"I think it is extremely unlikely that Labour would want to be hitting pensioners on the basic pension. We have matched the Government on the triple lock and I would expect us to continue to do so."
Treasury minister Sajid Javid said that further welfare cuts could be expected on top of the under-25 housing benefits and council house means-test mentioned by the Chancellor.
"The suggestions that the Chancellor made are just two suggestions," Mr Javid told World at One. "Of course more needs to be done than that. On welfare, we will focus on welfare to see what savings we can find further."