Chancellor George Osborne delivered a hike in VAT and slashed welfare spending as he moved "decisively" to tackle Britain's record debts.
Presenting his first Budget to a packed House of Commons, he promised "tough but fair" action to wipe out the structural deficit within five years.
And he laid the blame for the pain ahead firmly at the door of the former Labour government, saying: "The years of debt and spending make this unavoidable."
However his plans were denounced as "reckless" by acting Labour leader Harriet Harman, who warned those least able to pay would be the hardest hit.
Outlining the cuts, Mr Osborne announced the public sector pay freeze would be extended for two years for staff on £21,000 or more.
Child benefit is to be frozen for three years while tax credits will be cut for families with incomes over £40,000 a year.
The Government is to move quicker than previously planned towards raising the state pension age to 66.
Housing benefit payments are to be capped and disability living allowance claimants are to face a new medical assessment.
Mr Osborne said the welfare shake-up will save the country £11 billion by 2014/15. He also warned that Government departments whose budgets have not been ring-fenced would be faced with cuts of 25% in the autumn spending review.
But there was a sweetener when he confirmed widely trailed plans to raise personal allowances for basic rate tax payers by £1,000 to £7,475 from next April, taking 880,000 of the lowest paid out of income tax altogether.
He also announced that from April next year the link between the basic state pension and earnings would be re-established.
"Yes it is tough; but it is also fair," he said.
He also laid into the economic legacy he had inherited from the previous government.
"This is an emergency Budget, so let me speak plainly about the emergency that we face. The coalition Government has inherited from its predecessor the largest budget deficit of any economy in Europe with the single exception of Ireland.
"One pound in every four we spend is being borrowed. What we have not inherited from our predecessor is a credible plan to reduce their record deficit."
Ms Harman said it was the most vulnerable who would suffer most under the Government's plans.
"This is a Tory Budget that will throw people out of work, that will hold back economic growth and will harm vital public services," she said.
However, she reserved her harshest comments for the Conservatives' Liberal Democrat partners who, she said, had fought against measures like the VAT increase which they were now supporting.
"How could they support everything they fought against, how could they let down everyone who voted for them, how could they let the Tories exploit them?" she demanded.
"The Liberal Democrat leaders have sacrificed everything they ever stood for to ride in ministerial cars and ride on the coat tails of the Tory Government."
Among the measures Mr Osborne announced:
* A cut in corporation tax over the course of the Parliament from 28p to 24p.
* A bank levy from January 2011 which is expected to generate over £2 billion annually.
* No new increases in duties on alcohol, tobacco or fuel.
Mr Osborne also confirmed a controversial hike in capital gains tax on non-business assets for higher rate taxpayers from midnight.
However the new 28p rate - 10p higher than previously - was less than some commentators had been predicting.
The Chancellor said a Treasury analysis suggested it would actually have resulted in smaller revenues and would have been "self-defeating".
He announced he was reversing the previous government's plan to increase the duty on cider by 10% above inflation.
The reduction would come into effect at the end of this month, he said, joking that it would be "just in time to celebrate England's progress to the quarter finals, or else to drown our sorrows".
The Chancellor acknowledged that economic growth would initially be slower as a result of the Budget measures, but said it would pick up towards the end of the Parliament.
He said the Office for Budget Responsibility (OBR) now estimated growth this year of 1.2% and 2.3% next year - compared to its previous forecasts of 1.3% and 2.6%.
However, he said that from 2012 growth would pick up to 2.8%, then 2.9% and 2.7%, as against previous OBR forecasts of 2.8%, 2.8% and 2.6%.
Borrowing this year is now expected to be £149 billion compared to an estimate of £155 billion under the previous government's plans.
It will then fall back to £116 billion, £89 billion, £60 billion, £37 billion, and £20 billion in the years ahead.