Chancellor George Osborne has set out plans to cut a further £25 billion from public spending - including £12 billion from benefits - after the 2015 election, as he said that the size of the state and the welfare system must become "permanently smaller".
The comments came in a speech in which Osborne said 2014 was the "year of hard truths", warning voters that only further austerity measures can pay for tax cuts and better job prospects.
He claimed that Labour was "simply not being straight with people" by suggesting that there was a "magic wand" which would allow a chancellor to spend more on public services.
In the first major political speech of the New Year, Osborne sought to draw clear economic dividing lines with Labour ahead of next year's general election, insisting that the Government's economic plan is working, but that more time was needed to "finish the job".
"Thanks to the hard work of the British people, our economy is on the mend - and our country is doing better," said Osborne.
"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."
Osborne said the Government's long-term plan for the economy was made up of five key elements - reducing the deficit, cutting income taxes and freezing fuel duty, creating jobs, reducing immigration and capping welfare, and improving education.
His speech came a day after David Cameron promised that a majority Conservative government would preserve the so-called "triple lock" which sees state pensions rise in line with inflation or average earnings or by 2.5%, whichever is the higher.
But Osborne 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," he said. "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 the new Birmingham HQ of car parts firm Sertec as it announced plans to take on 400 workers over the next four years, Osborne said the only way to ensure future jobs and prosperity for Britain 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."
After a run of good economic figures on jobs, growth and business confidence, Osborne said that, for the first time in a long while, there was a sense that Britain was "on the rise".
But he warned against "a dangerous new complacency", saying: "You hear some talking as if the hard part of the job is done - and we can go back to the bad old habits.
"But beware those who come along this year and promise you easy answers, no more sacrifices, just more spending on this and more spending on that, all paid for by more borrowing...
"It's far too soon to say 'Job done'. It's not even half-done. That's why 2014 is the year of hard truths, the year when Britain faces a choice.
"Do we say 'The worst is over; back we go to our bad habits of borrowing and spending and living beyond our means - and let the next generation pay the bill'?
"Or do we say to ourselves 'Yes, because of our plan, things are getting better. But there is still a long way to go - and there are big, underlying problems we have to fix in our economy'?"
He added: "When I took this job, Britain was borrowing more than £400 million every single day to pay for government spending.
"But as a result of the painful cuts we've made, the deficit is down by a third and we're borrowing nearly £3,000 less for every one of you and for every family in the country. That's the good news.
"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."
While refusing to rule out tax changes, Osborne restated his belief that his economic plans can be delivered in the next Parliament without further tax increases.
Shadow chief secretary to the Treasury Chris Leslie said: "George Osborne should admit his policies have failed and led to a cost-of-living crisis.
"While millions of ordinary working people are worse off under the Tories, he and David Cameron are paving the way for yet another top rate tax cut for millionaires.
"The reason more spending cuts are needed after 2015 is because his failure on growth and living standards since 2010 has led to his failure to balance the books.
"What we need is Labour's plan to earn our way to higher living standards for all, tackle the cost-of-living crisis and get the deficit down in a fairer way."