George Osborne told business leaders at the annual CBI dinner that they need to hold their nerve and back the government’s austerity policy.
His comments came on the day that the Bank of England was able to present an upbeat picture of the future of the UK economy, predicting that inflation will fall faster and the economy grow by more than previously thought since the last quarterly inflation report in February.
The Chancellor told the CBI that business leaders need to back the government to “see this through” and ignore alternatives to push through stimulus investment to help boost the economy.
He said: "Now is not the time to lose our nerve. Let's not listen to those who would take us back to square one. Let's carry on doing what is right for Britain. Let's see this through.
Mr Osborne pointed to the recent economic announcements, saying: “The fact is, the most recent economic news has been more encouraging. The economy is growing. Surveys are better. Confidence is returning to financial markets. This is all reflected in the Bank of England's Inflation report. As the governor says, 'There is a welcome change in the economic outlook'."
Mr Osborne said that the government needed to keep spending under control and let the central bank support the economy through monetary policy.
He said: "The most powerful weapon we have in supporting economic demand is monetary policy," he added. "So we have been monetary activists, helping keep interest rates low for families and firms, keeping credit channels open, using our balance sheet to encourage private investment, and repairing the banks.
"You cannot have an activist monetary policy if you're not fiscally responsible."
The timing of the speech worked well for Mr Osborne, coming on the same day that Sir Mervyn King, presenting his final inflation report before Mark Carney takes over as Governor of the Bank of England, was able to say for the first time in five years that the economy looks on course for a sustained recovery.
However, separately official figures showed unemployment went up by 15,000 to 2.52 million in the three months ending in March.
He said that inflation is expected to fall back to the central bank’s 2.0 per cent target within two years. In February the bank said inflation would be 2.3 per cent in two years, down from its current level of 2.8 per cent.
Sir Mervyn also said that GDP growth is “likely to strengthen a little over the course of this year,” with the bank predicting growth of between 1.1 and 1.3 per cent, up from their previous estimate of 0.9 per cent economic growth for 2013.
However, Labour attacked the Chancellor for being in “total denial about the failure of his economic plan."
Labour's shadow treasury minister Chris Leslie highlighted how the United States has been able to half its deficit through an economic policy focusing heavily on stimulus not austerity. The Congressional Budget Office's report shows the US deficit falling to almost half the UK level of 7.6 per cent of GDP, and said it would fall below 3.0 per cent by 2015, two years aster than in the UK.
Mr Leslie said: "If we're to have a strong and sustained recovery, and catch up all the ground we have lost over the last three years, we need urgent action to kickstart our economy now and reforms to strengthen it for the long-term."