Fuel duty is to be frozen, benefits squeezed and pension pots raided as the economy continues to flounder, George Osborne has announced.
The Chancellor, in his mini-budget, revealed that he is scrapping the planned 3p hike in fuel duty set for January and will also postpone April's rise.
The move is aimed at easing the pressure on struggling workers and families, but it was a rare piece of good news in an otherwise bleak Autumn Statement.
Mr Osborne warned there are no "miracle cures" for the economy as he admitted austerity will now have to last up to 2018, well into the next parliament.
He was also forced to concede that the Government is set to miss its target of reducing debt by 2015 and that slashing the deficit will take longer.
And he revealed that the economy is now forecast to shrink by 0.1% this year - compared to the 0.8% growth predicted just nine months ago.
Labour seized on the bleaker assessment by the Office for Budget Responsibility (OBR), claiming it revealed "the true scale of this Government's economic failure".
But Mr Osborne insisted the country was "making progress", and argued that changing course now would be a "disaster".
Benefits and tax thresholds will only rise by 1% for the next three years - a below-inflation increase that will save £3.7bn, although pensions and disability and carer allowances will be exempt.
In a bid to show the coalition is on the side of the "strivers", the income tax threshold is being hiked by £235 and will now reach £9,440 next April.
The basic state pension will rise next year by 2.5%, up to £110.15 a week.
Higher earners will, in turn, have their pension pots hit as their tax relief is slashed from £50,000 to £40,000-a-year from 2014 and from £1.5m to £1.25m over a lifetime.
More people will also be dragged into the 40% tax rate because the earnings threshold will rise by just 1% in 2014 to £41,865 and then £42,285 the following year, saving around £1bn.
"I know these tax measures will not be welcomed by all; ways to reduce the deficit never are. But we must show we're all in this together," Mr Osborne said.
A £5bn boost for capital projects, funded by a new round of cuts to most Whitehall departments, was also confirmed.
Elsewhere, HM Revenue & Customs will receive an additional £77m to help crack down on people and businesses dodging tax.
Corporation tax has been further cut to 21% to and a £1bn Business Bank was unveiled.
There was also a massive hike in the investment allowance, rising from £25,000 to £250,000, to help smaller firms.
Other measures include an extra £1bn for road schemes and a Tube line extension, and £600m for science to fund research into cutting-edge technologies.
Automatic rises in teachers' pay have also been scrapped. They will now be paid in line with their performance, with schools deciding salary levels within set bands.
On energy, a Government office for shale gas has been launched to simplify regulation and a consultation will be staged on tax breaks about the use of the unconventional fossil fuel.
Despite the dire state of the economy, Mr Osborne - who has now been Chancellor for two-and-a-half years - vowed to keep to his austerity programme.
Taking on his critics, he declared that he was "confronting the country's problems, instead of ducking them".
"It's a hard road, but we are getting there. Britain is on the right track and turning back now would be a disaster," he said.
Mr Osborne told MPs that the Government was still on course to eliminate the structural deficit, according to estimates by the OBR.
But the watchdog does expect the coalition to miss the second key target of having public sector debt falling as a proportion of gross domestic product by 2015-16.
It predicts the Chancellor will be forced to borrow an extra £84bn by 2017-18 as the economy struggles to recover.
The latest figures will spark fresh fears that the UK's highly-coveted AAA credit rating could be downgraded - a move that would threaten the country's financial stability.
Shadow chancellor Ed Balls claimed that the coalition's economy strategy had been "completely derailed".
"The defined purpose of the Government, the cornerstone of the coalition, the one test they set themselves - to balance the books and get the debt falling by 2015 - is now in tatters," he said.
Anti-poverty campaigners also reacted with anger to the welfare squeeze, arguing that it would punish working families "already on the edge".
The move breaks the link between pay-outs and inflation and means up-ratings are likely to remain below inflation in future years, gradually reducing their value over time.
It will have to be introduced via new legislation and a Welfare Uprating Bill will be tabled shortly - creating a political dilemma for Labour.
Job Seekers Allowance, Employment and Support Allowance and Income Support as well as elements of Child Tax Credit and Working Tax Credit will all be subject to the cap.
Child benefit will continue to be frozen next year, and will then rise by 1% annually for two years from April 2014.
The TUC calculated that the combination of real-terms cuts to child benefit announced in the Autumn Statement and in previous budgets, will cost a family with two children more than £1,000 over the course of the Parliament.
And new real-terms cuts to tax credits will have an even bigger impact. A family with two working parents on a combined income of £40,000, two children and childcare costs of £300 a week will lose around £2,800 a year by 2015/16, the TUC said.
TUC general secretary Brendan Barber said: "This Chancellor has presided over one of the biggest ever squeezes on the budgets of working families.
"Small gains on fuel and the personal allowance are dwarfed by the swingeing cuts to child benefit and tax credits that many millions of families rely on to get by."
Individual unions also hit out at the Chancellor's measures.
Unite general secretary Len McCluskey said: "George Osborne's credibility is in tatters. His addiction to austerity has strangled growth and risks not just deferring recovery but trashing the economy altogether. He is cutting his way to national calamity."
But business leaders welcomed the boost to infrastructure, investment and exports.
CBI director-general John Cridland, said: "£5bn on near-term infrastructure, like the tube to Battersea, half a billion a year tax relief for small firms, and £1.5bn extra export support should boost investment and create jobs.
"The Government now has everything to prove by delivering. Businesses need to see the Chancellor's words translated into building sites on the ground."