The Conservative party needs to reverse the "great socialist coup" of the last decade by ending welfare dependency and encouraging wealth creation by cutting taxes, the former defence secretary Liam Fox has argued.

In an unashamedly Thatcherite call to arms, Fox called for an end to the ringfencing of Whitehall departments, which would lead to dramatic cuts in NHS spending.

Calling for lower taxes, Fox said: "The great socialist coup of the last decade was making wealth an embarrassment. It is not. It is the prize for aspiration and hard work, and its side effects are higher tax revenues, more jobs and more investment."

The speech by the former defence secretary to the Institute of Economic Affairs (IEA) comes after Theresa May positioned herself over the weekend for a future Tory leadership by outlining her political creed in a speech that went well beyond her brief as home secretary.

Downing Street is being warned by some Tory backbenchers unsettled by the United Kingdom Independence party's recent success in Eastleigh that David Cameron may face a no-confidence vote in the summer if the budget is perceived as weak and the Tories perform badly in the local elections in May.

Fox's speech was praised as terrific by Stuart Wheeler, the former Tory donor who is now Ukip's treasurer. Wheeler sat in the front row for the speech at the IEA headquarters in London.

The former defence secretary, who has his eye on a return to cabinet after his resignation in 2011 over the role played by an informal special adviser, has been going out of his way in recent months to be supportive of George Osborne. But his speech marked a challenge to Osborne and the chancellor's own great foe, Gordon Brown.

Fox questioned Osborne's famous pledge at the Conservative conference in 2006 not to make "upfront promises of tax cuts". He said: "I believe that the country will be at its best when the government is small and people are left to enjoy the fruits of their own labour. I believe that in leaving money in people's pockets, economic activity will follow.

"People will buy houses, invest for their future or just go shopping. Whichever is the case, it is creating a society that is sustainable for the future in a way that our current – welfare dependent and debt ridden – economy is not."

In a dig at Osborne, the former defence secretary invoked Margaret Thatcher as he made the case for a low-tax economy. In his speech to the 2006 Tory conference, in which he ruled out unfunded tax cuts, the future chancellor quoted Thatcher, who said: "I am not prepared ever to go on with tax reductions if it meant unsound finance."

Osborne also used his speech in 2006 to outline the Tory policy, abandoned in 2008 in the aftermath of the financial crash, to share the proceeds of growth between lower taxes and increases in public spending. Fox said the "socialist" spending of the last decade was never sustainable after Brown increased the amount of public spending as a proportion of GDP from 40% in 1997 to 52% in 2010.

The former defence secretary said this showed the importance of challenging one of the Tories' other key decisions from the time it was matching Labour spending – the ringfencing of spending on the NHS and international aid.

He said: "We must also ask whether ringfencing departmental budgets makes sense in a period of prolonged austerity and let's be clear, that is what we are in because this is no short, cyclical correction but a longer-term structural correction made necessary by both global economic forces and our own history of massive overspending."

Fox lambasted Brown for a massive expansion of the welfare state. He said: "History will judge Gordon Brown and his disciples harshly. They spent with abandon, rolling out the socialist vision of a big state. But much worse; rather than diminishing the reliance that individuals have on the state, they purposely pushed the drug of welfare addiction to more and more people, ensnaring even the affluent middle classes.

"As Margaret Thatcher so memorably put it – the one thing you can count on with a Labour government is that sooner or later they run out of other people's money. The trouble is, they have usually done a political bunk before the bills have to be paid, just as they have this time."