In a bleak Autumn Statement, the Chancellor said millions of working-age benefit claimants would see a below-inflation rise of just 1% over the next three years compared to 2.2% this year, but the vulnerable such as pensioners, carers and the disabled would be exempted.
Mr Osborne said it was fair that welfare recipients receive similar increases in income to those of public sector workers, who were getting a 1% rise as a lengthy pay freeze comes to an end. The move will save £3.7bn in 2015/16 and deliver "permanent savings each and every year from our country's welfare bill", he said.
Yet Chris Johnes, Oxfam's director of UK poverty, said: "Despite the Chancellor's tough rhetoric on tax avoiders, it is once again the squashed bottom who will feel the biggest pinch."
Insisting he was on the side of hard-working families who wanted to get on, Mr Osborne – who also raided the pension pots of the better off – scrapped the planned 3p-a-litre fuel duty rise and announced a further increase in people's tax-free allowance from next year.
But Labour said his Autumn Statement was "hitting the workers not the shirkers" as it insisted research showed a single-earner couple on £20,000 with two children would be £279 a year worse off as a result of the changes announced yesterday.
Next year the Coalition will look to find another £10bn of cuts for 2015, the year of the General Election, on top of the £6bn already identified.
In the Commons, the Chancellor was cheered by Conservative MPs but jeered by Labour opponents when he declared: "It's taking time but the British economy is healing."
Mr Osborne stressed the deficit had fallen by one-quarter and figures from the Office for Budget Responsibility (OBR), the Government's independent forecaster, showed it would continue to fall.
Borrowing was down, exports were up and 1.2 million new jobs in the private sector had been created.
But the growth figures from the OBR were grim reading with the economy now expected to shrink by 0.1% this year compared with a previous prediction of 0.8% growth.
The forecaster said growth had been much weaker than predicted and emphasised how the eurozone crisis was "likely to constrain UK growth for several years to come".
It also said it appeared "more likely than not" the Chancellor would miss his target for debt to start falling as a proportion of GDP from 2015/16, which Labour seized on, saying it revealed the "true scale of this Government's economic failure". Ed Balls, the Shadow Chancellor, claimed the UK was falling behind in the global race as a result of Mr Osborne's mismanagement of the economy.
John Swinney, the SNP's Finance Secretary, said the Chancellor's decision to extend austerity to 2018 showed "how badly his plan has failed" and that the "only certainty now offered by the UK is five more years of public spending cuts".
Meanwhile, OBR figures for oil and gas revenue were seized on by the Better Together campaign as they showed that falls in oil and gas production and prices meant they would slump from £7.3bn in 2013/14 to £4.4bn in 2017/18.
The pro-UK group said that, if the SNP had its way, Scotland would become independent at the very moment oil began to run out. It said being part of a "larger, diverse UK economy" was in Scotland's best interests.
A spokesman for Mr Swinney insisted North Sea oil was a "massive resource for Scotland" with 24 billion barrels worth £1.5 trillion still to be extracted and that an independent Scotland would use it to "create a wealthier and fairer country".