Mr Osborne told the Conservative Party conference that it was unfair that increases in state help outstripped pay rises since the start of the recession.
“Even with the reforming decisions that Iain Duncan Smith and I have taken, benefits have risen more than earnings since Labour’s great recession,” he said.
“That is not sustainable for any nation and it is not fair either.
“So I can tell you this today, working age benefits will have to be frozen for two years.
“This is the choice that Britain needs to take to protect our economic stability and to secure a better future.”
Mr Osborne said the policy would save £3 billion and would exclude disability and pensioner benefits.
He added he wanted a welfare system that is fair to those who you use it and pay for it.
Mr Osborne told delegates: “This freeze on working age benefit saves the country over £3 billion. It’s a serious contribution to reducing the deficit. Pensioner benefits and disability benefits will be excluded.
“And to those in work I say this - where is the sense in taxing you more only for you to be given some of your own money back in welfare. The best way to support people’s incomes is to make sure those out of work get a job and those in work pay less tax.”
In his final conference speech before the country chooses a new government in May, Mr Osborne urged voters to “choose the future, not the past”.
The Government’s economic plan was “working” in getting the UK back on the path to prosperity, he said, and promised “we will finish the job which we have started”.
He warned that a Labour victory in the May 2015 general election would risk pitching the country back into the economic chaos of recent years.
Mr Osborne told activists: “We need to lay out our case before the nation and ask it to choose the future, not the past.”
“I believe it is perfectly possible for Britain to be the most prosperous major country on Earth, the most prosperous, the most dynamic, the most creative - but only if we, in our generation, provide the answers to the big questions, only if we choose the future, not the past.”
He tore into Ed Miliband over his failure to mention the deficit in his keynote speech to the Labour Party conference last week.
“Did you see that speech last week?” he asked, to laughs in the hall.
“Ed Miliband made a pitch for office that was so forgettable he forgot it himself.
“In all seriousness, 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.”
Mr Osborne insisted the economy “may mean nothing to Labour but it means everything for the people of Britain”.
“There’s a fashionable claim made these days, a claim that the link between prosperity of the national economy and the prosperity of people who live in that economy has been broken - and I want to take that head on because it is a dangerous fallacy.
“Ask the millions of people who lost their jobs, whose incomes were cut, whose aspirations were destroyed by Labour’s great recession. Ask them whether they think the link between their lives and the lives of the economy is broken and they will tell you from bitter experience they paid a heavy price for that.”
Turning to Labour’s spending vows for the NHS, Mr Osborne said: “Last week you heard promises that were built on sand.
“Let’s be clear - you cannot have a properly funded National Health Service unless you have a properly run economy. Put another way, it’s only because we are willing to take difficult decisions on spending in other departments that we are able to increase the NHS budget every year of this Parliament.
“So don’t let anyone in this party concede the NHS to Labour. They would ruin our NHS. The real party of the NHS is in this hall today.”
Warning of more austerity to come, Mr Osborne said: “I don’t stand here marvelling at how much we have done.
“On the contrary, I am humbled by how much we have to do.
“The debts that need reducing, the small businesses that need supporting, the jobless who need employing, the infrastructure that needs building, the better future for Britain that needs securing.
“We here resolve we will finish the job that we have started.”
Turning to employment, Mr Osborne told delegates: “The good news is that youth unemployment has fallen sharply. The sad news is that there are still too many young people who have fallen for a culture of welfare dependency and a life on the dole.
“It’s a scar on our society, a tragic waste of human talent and we can end it in the next Parliament.
“So let this party of progress make another choice - let’s abolish long-term youth unemployment altogether.”
Outlining the plan to “abolish” youth unemployment, Mr Osborne said: “Here’s how we will do it: we will replace job seekers’ allowance, reform housing benefit and take the benefit cap we have introduced down to £23,000.
“Families out of work should not get more than the average family in work.
“All of these savings will be used to fund three million new apprenticeships, three million more chances for a better life so we help our citizens get jobs instead of more immigration from abroad.”
Mr Osborne said there was a choice between paying young people to be on the dole or “giving them the keys of opportunity”.
“Be in no doubt which side this party is on,” the Chancellor said.
“We choose their future.”
Mr Osborne said it was the “deliberate policy” of the Government to support job creators and enterprise and condemned Labour for being “positively anti-business”.
“It came through in every sentence Ed Miliband remembered,” Mr Osborne said.
The Chancellor said he would deliver the “lowest, most competitive business taxes of any large country in the world”.
But in a tough message to big firms, he said: “It is this pro-business Conservative Chancellor who says to some of the biggest technology companies in the world this today.
“You are welcome here in Britain with open arms. You have the advantages of our skilled population, broadband connections to deliver your services and our NHS to keep your employees healthy.
“Advantages that have to be paid for, so while we offer some of the lowest business taxes in the world, we expect those taxes to be paid not avoided.
“Some technology companies go to extraordinary lengths to pay little or no tax here. If you abuse our tax system, you abuse the trust of the British people and my message to these companies is clear.
“We will put a stop to it: low taxes but low taxes that are paid - part of our effort to reduce the deficit.”
Mr Osborne won a lengthy standing ovation as he told the conference: “We are eight months away from one of the most important general elections in a generation. We can face it with confidence, for we go to the people as the party of progress.
“For five years, Britain has pursued a clear economic policy when all over Europe there has been crisis and uncertainty. Britain has been the lantern in the storm.
“Now we seek a new mandate as the party of jobs and security and a strong Prime Minister, aganst the party offering higher taxes, more debt and Ed Miliband.
“We are going to offer political resolve and economic competence, a confident future for Britain as the most prosperous country in the world.
“And we are going to say to the British people - Choose jobs, choose enterprise, choose security, choose prosperity, choose investment, choose fairness, choose freedom, choose David Cameron, choose the Conservatives, choose the future.”
Mr Osborne restated his determination to press ahead with the HS2 rail link between London and the Midlands and North, as part of a plan to boost growth in the North of England.
It was “not healthy” to allow London to dominate the country too much, but the answer was not to try to pull the capital back but to create a “northern powerhouse” to drive the rest of the country forward,” he said.
“Let us choose today to make reducing the gap between North and South, between London and the rest, one of the central ambitions of the next Conservative government,” he said.
Mr Osborne said that on issues like building HS2, deciding on a future runway for south-east England and developing shale gas fracking, Britain faced a choice to “decide or decline”.
He won applause as he confirmed the immediate abolition of the 55% penalty tax on pension pots being passed on by savers to children or grandchildren after their death.
Labour Treasury spokesman Chris Leslie said: “Having failed to balance the books in this Parliament, George Osborne has made his choice.
“He is choosing to give the richest 1% a £3 billion-a-year tax cut and opposing a mansion tax while cutting tax credits which make work pay for millions of striving families. While working people have seen their wages fall by £1,600 a year since 2010, the Tories have once again shown they are the party of a privileged few at the top.
“Labour will balance the books as soon as possible in the next Parliament, but we will do so in a fairer way. We will reverse the Tory tax cut for millionaires, stop paying the winter fuel allowance to the richest 5% of pensioners and cap child benefit rises at 1% for two years.”