The shadow chancellor has outlined how he hopes the Tories could increase spending on schools, hospitals and pensions and still cut taxes.
Letwin predicts Labour tax rises
In a keynote speech Oliver Letwin said he could make £35bn of savings a year by 2011, while also matching Labour's schools and hospital spending pledges.
He said: "Britain needs and deserves a smaller... more accountable... more affordable government."
Labour said the savings would lead to cuts in frontline public services.
Chancellor Gordon Brown said Mr Letwin's proposals were "extreme" and "a return to the old days of the Thatcherite years".
And he cast doubt over Mr Letwin's figures, arguing that just half a billion pounds of savings could be achieved through reductions in waste.
Mr Letwin said that while spending on health, education and pensions would rise by more than 6% a year, other areas would get a real-terms budget freeze.
This would mean the Conservatives would increase the overall level of public spending, but at a rate below the growth in the economy - thereby reducing the share of the national wealth spent on the public sector, he said.
Ahead of the shadow chancellor's speech, details of the government's own efficiency review headed by Sir Peter Gershon appeared in the Financial Times.
The leaked report suggests that up to £15bn in savings could be achieved by cutting 80,000 jobs in the civil service.
Mr Letwin welcomed news of this review and argued his plans would stave off the tax rises that Labour would need in a third term in office because of its projected spending plans.
Mr Letwin said he would cut the cost of running government but match Labour spending on health and education to get more "bang for the buck".
He said pensions under the Tories would rise "broadly" in line with current Treasury forecasts.
Part of the money saved would be used to pay off government borrowing, but Mr Letwin would not rule out some of the savings being used for tax cuts.
Responding to Mr Letwin's speech, Mr Brown said: "I believe they [the Tories] are completely out of touch with the needs of hard working families."
In a statement, Labour said the first £18bn of Mr Letwin's proposed savings would be equivalent to cutting:
66,600 police officers
- 107,910 teachers
- 300 new secondary schools
- 83,300 nurses
- 42,850 doctors
- 20 new hospitals.
But former Tory chancellor Ken Clarke told BBC Radio 4's PM programme: "He isn't cutting.
"He is simply proposing the increase in total public spending should be
slower than that which Gordon Brown has been permitting and that which would
take place under Labour."
For the Lib Dems, Vincent Cable said: "It's all very well for the Conservatives to make these pie-in-the-sky pledges.
"The real question is where will they get the money to pay for their spending commitments?"