George Osborne was urged tonight not to cut the deficit by reducing benefits paid to the poorest, as a coalition of charities and campaigners warned that this would be "a tragedy for millions and a travesty for the economy".

The Chancellor pledged to "tackle welfare bills" yesterday, as part of a range of measures to save billions of pounds in his autumn statement this week. He is expected to announce a below-inflation rise in key state benefits, including unemployment payments, while also raising revenue by cutting pension tax relief for the wealthy.

But in a letter to The Independent, more than 50 charities, academics and unions urged Mr Osborne not to penalise the poor at a time when food and utility prices are rising.

"It would be a tragedy for millions, and a travesty for the economy, to push the poorest into deeper poverty by this week failing to uprate benefits in line with inflation, or by making other cuts to social security for families and disabled people," they state.

The Liberal Democrats are understood to have objected to plans for an absolute freeze in benefits, and have already blocked Tory plans to remove housing benefit for the under-25s. However with average earnings rising at a lower rate than inflation the two parties are believed to have agreed that welfare payments should not rise in line with inflation – but instead at a lower level, possibly one per cent.

Although pensioners and the disabled are expected to be spared any freeze, the charities claim that the plans will force vulnerable families to cut down on essentials.

"With basic living costs increasing, we know many families are having to make difficult choices; a freeze on benefits and tax credits will make these choices even harder," the letter says.

Signatories include Alison Garnham, chief executive of Child Poverty Action Group (CPAG), Anne Marie Carrie, chief executive of Barnardo's, and Fiona Weir, chief executive of single parents charity Gingerbread.

They write: "This week's autumn statement could leave thousands of children and families even further away from being able to meet their essential costs of living.

"As organisations and individuals concerned with their wellbeing, we are increasingly worried that the statement may worsen already-alarming projections that child poverty will rise by 800,000 by 2020."

CPAG also cited a recent warning from the International Monetary Fund that struggling countries which cut social security payouts and housing subsidies risk doing further damage to their economies.

Yesterday Mr Osborne made clear that reducing the welfare bill would be a central element of Wednesday's autumn statement, which is being touted as a mini-Budget.

"We are going to tackle welfare bills, and … the welfare system which is deeply unfair for working people," he told BBC's Andrew Marr Show.

"We've already made £18bn of savings from the welfare bill … but we're determined to reform welfare, not just to cut bills, so that work always pays, that it's always better off for someone to work that extra hour, to go out and get the job, and fundamentally that is about creating not just a fairer society, but a more competitive society. That is the Conservative approach to fairness, make the rich pay but also make sure you are tackling the welfare system, which is deeply unfair."

But the shadow Chancellor, Ed Balls, insisted that it was only Mr Osborne's economic strategy that meant he needed to find further savings. "The welfare bill is up because inflation is up and long-term unemployment is up," he said. "The Work Programme is failing, he's cutting taxes at the top. And then he says 'I'm going to hit people at the bottom'."

John Sentamu, the Archbishop of York added: "While the poorest see their incomes slashed, incomes at the top have been rising rapidly – but everyone deserves a decent quality of life."

Liberal Democrat sources said they believed that they had negotiated a "balanced package" which would be seen as fair.

However they did not deny suggestions that the autumn statement would include some real-terms benefits cuts.

"This is an important moment for the Government," they said. "But I think if you look at the range of measures in the statement people will see that it is fair."

However research commissioned by the Trades Union Congress, published today, found that families would lose most, out of the £10bn cut in the welfare budget, with low-income households losing more than £700 each a year. That is compared with the richest 10 per cent of households who would lose an estimated £100 per family. Working single parents would lose more than £300 a year if the cuts go ahead, the report says.

Autumn statement: Osborne’s options

Freezing welfare benefits entirely

A popular measure among Tory backbenchers but opposed by charities and many Liberal Democrats who feel it’s draconian. Chances of inclusion: 2/5

Raising welfare benefits in line with average incomes – not inflation

Average incomes are rising at less than 2 per cent while the rate of inflation is higher. Osborne may argue that to make work pay, benefits should only go up this year by the rate of earnings. 4/5

Reduce the amount of money that people can pay into their pensions without paying tax on it from £50,000 to £30,000 a year

Mr Osborne has already stated that the autumn statement will increase the tax burden on the better off and pension tax relief is an obvious way of doing this. 3/5

Removing housing benefit from the under-25s

This idea was floated by David Cameron in a speech earlier this year – but appears to have been blocked by the Liberal Democrats. Expect it in the Conservative manifesto. 0/5

Introducing a mansion tax on the most expensive properties or introducing a new council tax band

A long-time aspiration of the Liberal Democrats, the proposal appears to have been vetoed by Mr Cameron so will not happen in this parliament. But again expect it in the Liberal Democrat manifesto. 0/5

Freezing fuel duty

Having been postponed once before, fuel duty is due to rise by 3p per litre in January. However Mr Osborne is almost certain to delay the rise again or scrap it entirely. 4/5