George Osborne took a calculated political gamble on Monday when he spurned the chance to ease austerity and instead announced that a re-elected Tory government would hit 10m households with a two-year freeze on benefits and tax credits.

The chancellor’s move, which will cut £3bn a year from the welfare budget, is designed to cement the Conservatives’ reputation as the party willing to take tough long-term economic decisions, even at the cost of hitting more than 5m families characterised as working poor.

But the political danger in promising to keep working-age benefits unchanged in the two years after an election is that Osborne alienates blue-collar workers already attracted either by Ukip or Ed Miliband’s promise to ease the living standards crisis.

The freeze will hit the poorest third in society most and see in-work families with children lose as much as £490 a year in child benefit and tax credits. The average loss will be £300 a year per household but will vary greatly.

Spurning the temptation to offer a traditional pre-election bribe, Osborne also announced that he was continuing with a freeze on public sector pay until 2017, meaning public sector workers will have seen their pay held back below inflation for seven years.

In his speech to the Conservative party conference in Birmingham, Osborne said he was levelling with the British people that now was not the time to ease up on cutting the deficit. “The problem for Britain is not that it taxes too little – it spends too much.”

Conservative strategists made the calculation that candour about the difficult spending choices ahead will gain Osborne political kudos and outweighs the risk of reinforcing a reputation for putting the burden of deficit reduction on to the backs of the poor. But there was a nervousness among some senior Tories that Osborne had abandoned the last vestige of compassionate Conservatism and bet the farm on such an unflinching approach to the deficit.

“And I tell you in all candour that the option of taxing your way out of the deficit no longer exists if it ever did,” the chancellor said.

Osborne balanced the tough message by announcing he was going to tackle technology companies such as Apple and Google, which have been accused of going to extraordinary lengths to offshore profits to avoid corporation tax. Apple’s tax deals will come under further scrutiny this week amid a threat that the European Union will impose a multi-billion pound fine this week for its decades-long deals with the Irish government.

Tory officials said detailed measures would be announced in the autumn statement, but hundreds of millions of pounds would be saved from the multinational clampdown on corporate tax avoidance. The two-year working-age benefits freeze takes £3.2bn a year off the welfare bill by 2017-18, the first step of the chancellor’s commitment to wipe £12bn more from the annual welfare bill.

This leaves Osborne still to find a further £9bn in welfare cuts in the first two years of the next parliament. Osborne also said he would cut general departmental spending by a further £13bn in the first two years of the parliament – enough, alongside growth, to put the overall budget in surplus by 2018. He said the latest Treasury estimate calculated £25bn was needed overall to eliminate the deficit, a figure that some government sources said might now be an underestimate.

After the speech, Osborne’s aides tried to flush out how quickly the shadow chancellor, Ed Balls, would cut the deficit if he would not match Osborne’s welfare cuts.

But Labour stressed it would make different choices, including raising taxes on the wealthiest. Osborne also took aim at the Labour leader’s failure to mention the deficit: “Did you hear that speech last week? Ed Miliband made a pitch for office that was so forgettable he forgot it himself. Well, I have to tell you in all seriousness that forgetting to talk about the deficit is not just some hapless mistake of an accident-prone politician, it is completely and totally a disqualification for the high office he seeks.”

The chancellor’s proposals have also caused tension in the coalition, with the Liberal Democrats indicating that they were opposed to the widespread benefits freeze. A Lib Dem source said: “We have consistently blocked Conservative attempts to freeze benefits for the working-age poor just as they have blocked our attempt to cut benefits for the wealthiest pensioners. It speaks volumes about the priorities of the Conservative party that they see benefit cuts for the working poor as a crowd-pleasing punchline for a conference speech.”

The detailed plan will see all the main working-age benefits, including child benefit, frozen at their post-election levels rather than being uprated in line with inflation.

Conservative officials said a working couple with one child, with each earning £13,000 a year, would lose £44 a year in child benefit and £310 a year in tax credits. A household with a single earner and two children would lose £75 a year in child benefit and £420 in tax credits. In 2012 Osborne imposed a 1% cap on most benefits, but the new proposed two-year total freeze for the first time includes housing benefit.

The officials justified the freeze by arguing that earnings have grown by 14% since 2007 while most working-age benefits have been uprated by 22.4%. Due to the two-year freeze and the 1% cap on increases announced in the autumn statement, the gap between earnings and working-age benefits will have been eradicated by 2017, the sources said.

Osborne had given himself little political room for manoeuvre by, in effect, ruling out any tax rises to cut the deficit. “I tell you in all candour that the option of taxing your way out of the deficit no longer exists if it ever did,” he told delegates. “In a modern global economy where people can move their investment form one country to another at the touch of a button and companies can relocate jobs overnight – the economics of high taxation are a thing of the past.”

The move came a day after Osborne said a Tory government would cut the maximum benefits a household could claim in a year from £26,000 to £23,000.

Osborne also said he would seek to end youth unemployment by giving unemployed 18 to 21-year-olds six months to find work or training before their jobseeker’s allowance would be withdrawn.