The budget: Vatman's dose of reality (VIDEO)

Budget coverage in full

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Mr Osborne admitted the double hit of tax rises and benefit cuts would be tough, but said the emergency measures were "unavoidable" given the debt crisis that would otherwise leave the country facing catastrophe.

Increasing VAT from 17.5 per cent to 20 per cent next year will bring in more than 12bn a year for the Treasury, but leaves households paying 400 extra a year.

An 11bn attack on benefits includes a three-year freeze on child benefit, middle classes being stripped of their tax credits and a crackdown on housing benefit and disability living allowance.

As public spending is slashed, Government departments will face spending cuts of 25 per cent by 2015 and public workers earning over 21,000 will have their pay frozen for two years. Even key departments such as education will not be protected.

Among the few measures to sweeten the pill were a 1,000 increase in the income tax threshold, a one-year council tax freeze, a 150 increase in child tax credits for those on low incomes and the restoration of the link between state pensions and earnings.

There was also a promise of help to boost the economies of regions like Yorkshire highly dependent on public sector jobs, and the official scrapping of a tax on holiday homes which threatened tourism businesses.

Mr Osborne's emergency Budget came just six weeks after the creation of the coalition Government and marks the most aggressive attack on the public finances in a generation, leading to accusations from Labour and the trade unions that the package was "reckless" and would threaten the economic recovery.

In a 55-minute speech to MPs which was fiercely critical of Labour's handling of the economy, Mr Osborne said: "I do not disguise that the combined impact of the tax and benefit changes we make today are tough for people.

"That is unavoidable given the scale of the debts our country faces, and the catastrophe that would ensure if we failed to deal with them."

The coalition Government had spent weeks preparing the public for yesterday's package, but the VAT increase still sparked anger, as one Liberal Democrat MP, Bob Russell, threatened to vote against the Budget.

During the election campaign the Liberal Democrats had launched a poster accusing the Tories of preparing a "bombshell" hike in the tax on goods, which Mr Osborne had dismissed as "nonsense".

Business Secretary Vince Cable last night admitted: "It may not have been the best designed advertisement campaign that's ever been considered."

The Treasury said it was forced into the VAT move because the deficit was larger than expected.

Families earning 30,000 will be stripped of any tax credits by 2012-13, costing them 545, but Mr Osborne insisted he was protecting the poorest. The increase in the income tax threshold will take 880,000 low earners out of paying tax altogether.

The new Office for Budget Responsibility (OBR) forecast that the deficit this year will be 149bn compared with an estimate of 155bn under the previous government's plans, and will be cut to 20bn by the next election.

The Chancellor acknowledged that economic growth would initially be slower than the OBR had been predicting, but said it would pick up towards the end of the Parliament.

Last night there was a boost for Mr Osborne as ratings agency Fitch said the Budget would "materially strengthen confidence" in the public finances.

The economic adviser to Deloitte, Roger Bootle, said the package was "tough but tender" but warned: "This Budget still hides some of the pain that will be felt because it has not yet laid out the detailed plans for public spending. That has to wait until the spending review due in October."

But Labour's Rosie Winterton, MP for Doncaster Central, said: ""We knew a Tory Government would be bad for Doncaster, but no one expected the degree to which the Liberal Democrats have sold out their supporters for ministerial cars to hammer South Yorkshire with Thatcherite cuts."