Oliver Letwin, the coalition's policy minister, has revealed the government's determination to instil "fear" among those working in the public sector, who he claimed had failed for the past 20 years to improve their productivity.

Letwin, architect of the coalition's plans to reform public services, told a meeting at the offices of a leading consultancy firm that the public sector had atrophied over the past two decades.

In controversial comments angering teachers, nurses and doctors, he warned that it was only through "some real discipline and some fear" of job losses that excellence would be achieved in the public sector.

Letwin added that some of those running schools and hospitals would not survive the process and that it was an "inevitable and intended" consequence of government policy.

"You can't have room for innovation and the pressure for excellence without having some real discipline and some fear on the part of the providers that things may go wrong if they don't live up to the aims that society as a whole is demanding of them," he said.

"If you have diversity of provision and personal choice and power, some providers will be better and some worse. Inevitably, some will not, whether it's because they can't attract the patient or the pupil, for example, or because they can't get results and hence can't get paid. Some will not survive. It is an inevitable and intended consequence of what we are talking about."

Mark Serwotka, general secretary of the Public and Commercial Services Union (PCSU), reacted angrily to Letwin's comments, describing them as "nonsense".

He added: "Public sector workers are already working in fear – fear of cuts to their job, pension, living standards and of privatisation. Far from improving productivity, the cuts are creating chaos in vital public services."

Letwin was speaking at the launch of a liberal thinktank's report at the London headquarters of KPMG, one of the biggest recipients of government cash, which won the first contract for NHS commissioning following the decision to scrap primary care trusts and further open the health service to private companies.

Letwin's recent white paper on public sector reform had been dismissed as watered down earlier this month amid speculation that the Liberal Democrats had vetoed radical change. But Letwin said on Wednesday that he believed he was prosecuting "the most ambitious set of public service reforms that any government in modern Britain has undertaken", adding that productivity had improved across the economy except in the public sector in the past 20 years.

A spokesman for the Office for National Statistics (ONS) said he did not know where Letwin had sourced his figures. However, an ONS analysis that works back to 1997, shows that productivity in public services fell on average by 0.3% a year between 1997 and 2008 because the level of inputs, such as staff and equipment, increased faster than the output, such as operations performed and numbers of pupils taught.

Harriet Harman, Labour's deputy leader, said last night that she did not recognise Letwin's portrayal of the public sector. "Death rates in hospitals have been falling, satisfaction levels have been rising," she said. "What hasn't changed is the Tories' antipathy to public services. And the idea that the way to improve public services is to put fear into those who provide them is absolutely grotesque."

A Cabinet Office spokesperson said: "It is widely acknowledged that there is a problem with productivity in public services. The government's policy is to improve it and provide the best value for the taxpayer."