George Osborne has squeezed benefits and issued further Whitehall cuts to pay for more spending on roads and schools and fuel duty cuts to ease the pressure on hard-pressed households.
Delivering his autumn spending statement amid grim economic forecasts, Mr Osborne insisted Britain's benefits bill could no longer rise faster than average wages.
He outlined how £3.7 billion could be saved by insisting large amounts of welfare will only rise by 1% for the next three years, which will mean a real terms cut.
Slashing the bill, as well as ordering government departments to find more cuts, will find money to be ploughed into economy-boosting projects.
Among those highlighted by the Chancellor was the long-awaited £30 million dualling of the A30 through Cornwall, which was given the go-ahead. Cornwall Council said by easing the notorious bottleneck near Temple on Bodmin Moor the area would reap £154 million in "transport benefits", while the economy could expect a £117 million fillip.
The upgrade, first proposed 25 years ago, was welcomed by MPs and business leaders. Cornwall councillor Mick Martin, chairman of the A30 Action Group that has lobbied for a dual-carriageway along the 2.8 mile stretch for many years, said: "Traffic congestion on the main roads in and out of Cornwall is a huge issue for holidaymakers, local residents and businesses.
"Not only will the proposals help address this congestion and improve the lives of many thousands of people, it will do so at a much lower cost to tax payers and in a much shorter time than these projects usually take."
The Chancellor's mini-budget also pledged to scrap a 3p-a-litre fuel duty increase planned for the New Year, offering relief to hard-pressed motorists.
And the Government also announced it will push for changes to European Union rules to allow motorists in the countryside to benefit from cheaper fuel.
A remote areas pilot scheme offering a 5p-a-litre rebate on the Isles of Scilly began earlier this year, but EU law prohibits an extension to the mainland.
Despite previously urging caution over the possibility of extending the rebate, ministers will now actively "explore" a further roll-out. In the House of Commons following the statement, Anne Marie Morris, MP for Newton Abbot, Devon, pressed Mr Osborne.
The Chancellor responded: "We are pressing with the (European) Commission to see if we can extend the definition of remote rural areas so that, for example, remote parts of the South West can benefit."
Mrs Morris said: "In the South West, the car is often a necessity rather than a luxury."
But the statement, ahead of a full budget next year, was marked by the Chancellor being forced to admit he had failed to meet his own targets for getting a grip on Britain's debt, blaming the 2008 crash which had created the worst economic shock since the Second World War. Mr Osborne also announced a plan to limit the amount the wealthy can put into pension pots tax free to £40,000, arguing that the richest must also contribute to tackling the deficit.
The new round of tax rises and spending cuts were needed because the recession was worse than previously thought – with GDP contracting by 6.8% in 200809, Mr Osborne revealed.
"Those with the most should contribute the most, and they will," he said. "But fairness is also about being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep, living a life on benefits. As well as a tax system where the richest pay their fair share, we have to have a welfare system that is fair to the working people who pay for it."
Breaking the link between inflation and the spiralling welfare bill, those on out-of-work benefits and the lower paid on income support and housing benefit will see lower rises.
Maternity pay and sick pay will also be affected but the disabled, carers and pensioners are immune.
Labour said 60% of families would be affected in some way with a real terms cut in benefits payments.
Mr Osborne also had to announce that the Office for Budget Responsibility predicts the economy will shrink this year by 0.1% after forecasting growth of 0.8% in 2012 just nine months ago. But he insisted: "The British economy is healing after the biggest financial crash of our lifetimes."