Osborne plans spending cuts to halt big tax rises

Gambling that voters are ready for austerity politics, the shadow chancellor warned they would have to make "very difficult decisions for the good of the country".

He said the Conservatives would reform public sector pensions, saying they were "not bound by the deal done between Labour and the unions" that protected retirement at 60 for many officials.

Health and overseas aid budgets would be saved from cuts — but there would be "a radical shake-up" in the way schools were supplied.

Labour seized on his remarks, hinting that next week's Budget would see Alistair Darling announce a package of Whitehall savings which would leave no room for the Tories to make cuts without biting into mainstream public services.

The Government has already pledged to limit spending rises to 1.1 per cent but Mr Osborne said the "atrocious" state of public finances meant even this was no longer affordable. "I am clear that 1.1 per cent is not sustainable," he told the FT.

Wednesday's Budget would be a "day of reckoning", he said, when higher borrowing, plummeting growth and higher unemployment would have to be admitted.

"I'm confident the British people understand the serious problems that lie ahead and that we can have the support of the public in dealing with the serious mess that Labour has created," he said.

He said the alternative to cuts would be heavy tax rises which would "kill off the recovery". Putting the argument to voters would form "the defining election of my generation", he said. A source close to the Chancellor said Mr Osborne's words left education and training budgets exposed to cuts, arguing that both were too important to economic recovery to reduce funding.

"The Tories are going back to the days of unfair and short-sighted spending cuts and schools and universities are first in line," said the Treasury source.

There is increasing speculation that Mr Darling will raid pensions in the Budget to bail out public finances in the short term.

Removing higher-rate tax relief could raise £7 billion but would mean higher-rate taxpayers having to increase their pension contributions by a third to protect the value of their retirement nest eggs.