The British economy has now been in recession for a whole year, longer than most people realise. According to little-noticed revisions to government statistics slipped out a couple of weeks ago, the economy started shrinking in the second quarter of last year.

Now with unemployment rising faster than at any time on record, family budgets squeezed by reduced wages and businesses still desperately trying to stay afloat, no one can talk of green shoots.

But recent economic data do give some hope that things are at least getting worse at a slower rate. That means we can start to hope for signs of positive growth by the end of the year. Of course, that’s a far cry from the current government forecast that the economy will start growing at the end of June. Instead it would mean the current Labour government would have presided over the longest recession since the war.

So the question facing the electorate at the next election is likely to be which party can offer the best recovery. How can we ensure that when the tentative green shoots emerge they are not killed off by the shadow of public debt and colossal tax rises?

The choice will be between building a sustainable recovery very different from the debt-fuelled boom that led us to this bust or the alternative of a “dead cat bounce” - a desperate attempt to pump the debt bubble back up one last time.

For the families who have lost their jobs or their homes as a result of the recession, that’s the difference between a chance to rebuild their lives and a second dose of pain and misery.

What is needed to make sure the recovery is real and sustainable?

First and most important, we need to accept the entire model of growth on which the British economy was founded over the past decade is fundamentally broken. For what Gordon Brown claimed was a new world of “stability” and “prudence”, turned out to be an illusion built on a mountain of debt.

Our banks are more leveraged than American banks, our households are more indebted than any other major economy in history and our government is forecast to be borrowing more than any other G20 country next year.

Unwinding this will be difficult and will take time, but we can do it if we have a clear vision of the future we wish to build. Britain has to pay its way in the world instead of creating the mirage of growth on the savings of others. We need to build an economy where we save and invest for tomorrow, instead of borrow and spend for today.

Second, that vision of the future demands a credible plan to restore some sanity and stability to the public finances. Without that plan, confidence in a recovery will be undermined both at home and in international markets by soaring national debt.

The choice for the chancellor on Wednesday is simple. He must reduce the future rate of growth of public spending below the 1.1% currently pencilled in to avoid the alternative of a £40 billion tax bombshell predicted by the independent Institute for Fiscal Studies. To put it in context, that is equivalent to an 8p rise in income tax – the kind of tax rise that would strangle any recovery at birth.

I am clear: the bulk of the strain in dealing with Britain’s record budget deficit must be borne by spending restraint, not further tax rises. We should not be overtaxed because Labour has overspent.

Third, we need the practical policies to move us towards that vision of an economy built on long-term saving and investment. That will mean changes to our personal and corporate tax system to encourage a shift away from debt. We could start on Wednesday by abolishing the tax on saving income for more than 20m basic rate taxpayers and increasing the personal tax allowance for pensioners.

We also need the government to take a more active role in supporting high-tech manufacturing, engineering and low-carbon energy. I am convinced by the arguments made by the likes of John Rose, chief executive of Rolls-Royce, and the entrepreneur Sir James Dyson that we need to create a more balanced and productive economy that is not so reliant on the three motors of finance, property and public spending for its future growth.

That means radical reform of education, better skills training and overhauling our dilapidated infrastructure – and it means targeted help now for the many thousands who have lost their job.

The budget on Wednesday will be a day of reckoning for Labour. That it takes place on the day when the latest unemployment figures are produced is fitting, for it reminds us all of the terrible human cost of the economic mistakes this government has made.

We owe it to the swelling ranks of the unemployed and to the children burdened with our debts to build a recovery on the solid foundations of saving and investment, instead of the shifting sands of debt that brought the house down in the first place.

George Osborne is the shadow chancellor

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