Chancellor tells Tory conference in Birmingham that benefits cap will ensure no unemployed family receives more money than families who work

George Osborne today announced a cap on the overall amount of benefits a family can receive from the state, which will result in 50,000 unemployed families losing an average of £93 a week.

Osborne unveiled the plan for a limit – estimated to be around £500 a week from 2013 – in his keynote speech to the Conservative conference in Birmingham, before confirming as expected that middle-class families would also be hit by the decision to end the universal entitlement to child benefit.

Osborne said that he and Iain Duncan Smith, the work and pensions secretary, had devised the biggest reform of the welfare state since the wartime work of William Beveridge.

He said it would result in "a radical new welfare state where it always pays to work, where effort is always rewarded and where fraud can no longer hide behind complexity".

The chancellor said the decision to set a limit on benefits accrued by households would appeal to British people's sense of fairness. The government claims that the projected savings are worth "hundreds of millions of pounds".

The measure will be introduced in 2013 and will be based on the median earned income after tax and national insurance for working families – estimated to be about £500 a week.

The Treasury claims the cap will apply to about 50,000 workless families, who will lose an average of £93 a week. The Tories claim that some families will lose as much as £300 a week; asked how many, a spokesman would only say this was at "the top end".

The limit will apply to the combined income from the main income benefit, other means-tested benefits such as housing and council tax, as well as child benefit, child tax credits and carer's allowance.

Non-cash benefits, such as free school meals, will not be affected and households with a disability living allowance claimant will be exempt in recognition of the extra living costs incurred by those with a disability.

War widows are also excluded from the cap, which will be delivered by town halls through housing benefit until the universal credit drawn up by Duncan Smith comes into place.

Osborne told delegates: "Unless they have disabilities to cope with, no family should get more from living on benefits than the average family gets from going out to work. No more open-ended chequebook.

"A maximum limit on benefits for those out of work. Set at the level that the average working family earns. Money to families who need it – but not more money than families who go out to work.

"That is what the British people mean by fair – and we will be the first government in history to bring it about".

A Tory spokesman told the Guardian later that the measure was intended to end the "unfairness" of unemployed people living in central London when working families could not afford to.

Osborne also announced his expected abolition of child benefit for higher earners, who he said received more than £1bn in child benefit in total each year.

The chancellor conceded that those paying the highest band of tax were not necessarily super-rich, before adding that the measure "makes sense" as the government seeks to ensure "we are all in this together".

The chancellor said the cut – which will apply to people on the 40% and 50% income tax rates from 2013 – was "difficult but fair". People earning more than about £44,000 would be affected if the measure was implemented now, although this limit comes down to £42,375 from April.

Osborne pressed home the case for his decision to stick by his controversial plan to wipe out Britain's £109bn structural deficit in one parliament.

He said the alternative – to delay the measures – would hit the poor and consign the country to a decade of debt as he told delegates that the nation was spending £120m a day on debt interest "thanks to the Labour government".

"How dare Labour call that protecting the poorest?" he asked to applause.

The chancellor railed against Labour's opposition to the spending cuts programme, saying that Ed Miliband's allegiance was to the unions.

"The vested interest or the national interest – I know which side we are on," he said.

Osborne outlined a number of "straight truths" the government needed to face up to, such the need reform public services. Failure to do so would lead to their decline, he warned.

Osborne said he hoped for a "reinvigorated, prosperous, united Britain" as the prize for tackling the deficit.

He hailed David Cameron, claiming his action in forming a strong coalition government pulled the country "back from the edge of the economic abyss".

Setting out why cuts in public spending would be necessary to reduce the deficit, Osborne said cutting the budget deficit could not just be an exercise in economics but about keeping the British people together "as we go through this".

Pointing to the decision to keep the 50p top rate of tax, Osborne said: "The public must know that the burden is being fairly shared. That's why I said last year: we are all in this together."

Brendan Barber, the general secretary of the TUC, said everyone could agree we need a fairer economy "built on higher, better balanced growth, but the spending and benefit cuts will do the opposite: pushing many people into poverty, hitting middle-income Britain hard and threatening growth."

Duncan Smith defended the child benefit cut this afternoon but admitted he did not "love the idea". He told BBC Radio 4's World at One: "Getting the deficit down is about taking tough choices. I don't love the idea of this – you know, as far as I'm concerned, it would be great to be in a perfect world where we didn't do this.

"But when you're paying £70bn a year just to stand still in deficit payments to banks and countries abroad, you have to get that money out somehow."

Asked if it was unfair for a single parent to earn just over the threshold and receive no child benefit, while two parents each earning just below the threshold would keep it, the work and pensions secretary said: "I know and there is no way of doing it in a more spread way than this. Of course when universal credit comes in, we will be able to taper this in a much, much more progressive way."

Yvette Cooper, the shadow work and pensions secretary, said: "This morning, you did not hear a measure announced that penalises every high earner, but a measure that penalises high earners with families.

"This is not 'we're all in this together' stuff."

Liam Byrne, the shadow chief secretary to the Treasury, said Osborne had chosen "to single out middle Britain for extra cuts" today.

Byrne added: "Of course, everyone supports cracking down on people abusing the benefit system and we will look carefully at the reforms they propose. But it's clear from today's speech that George Osborne's deficit reduction strategy is simply to make middle Britain pick up the bill for a crisis it did not cause."