George Osborne set out plans for a severe post-election squeeze in public spending while offering voters heading to the polling booths help for first-time buyers and a cut in the tax rate for savers.

Urging the public to realise Britain is “walking tall again” the chancellor also sought to argue against one of Labour’s principal lines of attack by saying living standards will be higher in 2015 than they were when the coalition came to office.

The chancellor effectively kicked off the election campaign, telling a packed Commons that “The critical choice facing the country now is this: do we return to the chaos of the past? Or do we say to the British people let’s go on working through the plan that is delivering for you.”

In an upbeat address lasting just over an hour, Osborne courted pensioners by making the first £1,000 of savings income tax free for a basic rate taxpayer.

He also announced a help to buy Isa, under which first-time buyers putting money away for a deposit on a home will receive a 25p top-up from the Treasury for every pound they save up, with a £3,000 limit for government support.

But the modest scale of giveaways worth about £3bn in 2016-17 were overshadowed by debate about the impact of the planned spending cuts. According to the Office for Budget Responsibility (OBR), the budget will mean “a much sharper squeeze on real spending in 2016-17 and 2017-18 than anything seen over the past five years”.

Ed Miliband said the Tories were seeking to hide an “extreme plan” to impose “colossal” spending cuts in the next parliament, and his aides argued that the budget did not represent a breakout moment.

The Liberal Democrats will use an unprecedented alternative fiscal statement in the Commons on Thursday to set out how they would depart from Osborne’s squeeze up to 2017-18. The Lib Dem-Labour pincer movement, combined with the OBR’s commentary, still arguably leaves Osborne in the firing line to be attacked as the austerity chancellor.

The OBR has projected real cuts in public services of more than 5% in 2016-17 and 2017-18, which is more than double the cuts seen in the tightest years of this parliament. Osborne can only soften that unprecedented squeeze on departmental spending through £13bn of welfare cuts that he has yet to identify or extra revenue from tax evasion.

The OBR intervention irritated the Treasury which had hoped to portray the budget as an easing of the chancellor’s medium-term spending plans, outlined in the autumn statement in December. Those indicated a dramatic scaling back of public spending in the next parliament to a level last seen in the 1930s.

In his budget the chancellor said he planned to cut his forecast for a fiscal surplus by 2019-20 from £23bn to £7bn. This meant spending as a proportion of GDP would no longer fall to the time of the Great Depression, but to the level of 2000, a period when Labour was in power.

Labour, determined not to lose one of its most effective attack lines of recent months, challenged Osborne’s claim, pointing to OBR figures confirming that in 2018, spending on day-to-day public services as a share of GDP will be at its lowest level since 1938.

Either way the OBR said the chancellor’s projections “showed a rollercoaster profile for implied public service spending through the next parliament”.

The OBR also said much potential output growth would be down to net migration rising to 165,000 a year, an increase of 60,000 on its previous forecast and way above the Conservatives’ pledge to cut net migration to below 100,000.

In his sixth and final budget of the parliament, Osborne largely made good his promise to spurn giveaways and gimmicks, limiting himself to 1p cut in beer duty and a freeze in petrol duty.

He also promised to lift the personal tax allowance to £10,800 in 2016-17 and to £11,000 in 2017-18, adding that the gains would be passed on to higher-rate taxpayers.

The government had faced criticism earlier in the parliament for not raising the 40% income tax threshold in line with inflation, since it has dragged an extra 1.3 million workers into a higher tax band during this parliament.

Arguing he was urging the country to choose the future, he declared Britain was on the road from austerity to prosperity and dubbed Britain as “the comeback country”.

Osborne also tried repeatedly in the budget speech to discomfit Labour by raiding funds that shadow chancellor Ed Balls had already set aside to spend on its flagship manifesto promises.

The chancellor announced a cut in the pension pot lifetime allowance, saving £600m that had been earmarked by Labour to help fund its flagship pledge to cut tuition fees. Labour is likey to respond by simply raising an even higher taxes on banks and the rich.

He also produced new figures, supported by the independent Institute for Fiscal Studies, to show that living standards will have risen by £900 in the parliament, as he sought to neutralise the Labour assault on falling living standards. Labour challenged the Treasury figures, and said such claims left Osborne looking out of touch with voters experience.

The OBR said the halving of the global oil price in late 2014 would boost growth, reduce inflation and deliver a £4bn windfall to public finances. It edged up its growth forecasts in both 2015 and 2016 by 0.1 percentage points to 2.5% and 2.3% respectively.

Lower debt interest payments and a smaller welfare bill have led the OBR to trim its forecasts for public borrowing in every year up to 2018-19.

The big losers from the budget were the banks, which were hit by an increase in the bank levy and by the end of tax breaks on the compensation paid out for mis-selling scandals. Money was also raised from better-off pensioners and from a fresh clampdown on tax avoidance.