George Osborne was today urged by Labour to implement "significant tax cuts" in next month's Budget.

Shadow chancellor Ed Balls suggested the Government could cut income tax by 3p, raise the income tax threshold to above £10,000 or increase tax credits for working people.

He said it would be "fairer and quicker" to cut VAT - as Labour has previously called for - but added that the Chancellor would be unwilling to admit his "mistake" in raising the sales tax to 20%.

In an article for The Sunday Times, Mr Balls warned of lasting damage to the economy if the coalition did not take action in the March 21 Budget to help squeezed households and promote growth.

"Without that decisive action in the Budget to boost growth, I fear we are in for a lost decade of slow growth and high unemployment which will leave a permanent dent in our nation's prosperity," he wrote.

His intervention comes after credit ratings agency Moody's last week put Britain on negative outlook, warning that it could lose its AAA standard.

Unemployment figures were also up again, with youth joblessness reaching another record high. Inflation, while falling in the latest update, continues to outstrip wages.

Mr Balls said the coalition had not just gone "too far and too fast" with spending cuts but also with tax rises, including the 2.5% hike in VAT.

"That is why the Chancellor should announce a temporary reversal of his VAT rise," he said.

"This is part of Labour's five point plan for jobs, which also includes tax breaks for small businesses taking on extra workers and bringing forward essential infrastructure investment.

"Such a tax cut now would boost confidence, help families feeling the squeeze and help get our economy moving again."

The shadow chancellor said it was "absurd" to suggest the £12 billion cost of cutting VAT was unaffordable when borrowing was £158 billion higher than planned because of slower growth and higher unemployment than forecast.

"Some people may be surprised to see Labour prioritising tax cuts. But in a crisis there is a premium on what works effectively and quickly to get our economy moving," he wrote.

"But if George Osborne can't bring himself to reverse his VAT mistake, he has other options. For the same amount of money, he could cut the basic rate of income tax by 3p for a year. Or raise the income tax personal allowance to over £10,000. Or increase tax credits for almost six million working people by around £2,000.

"It would be better to cut VAT now - it's fairer and quicker and would help pensioners and others who don't pay income tax. But any substantial tax cuts to help households and stimulate the economy would be better than doing nothing."

Tory deputy chairman Michael Fallon said: "This Government's credible plan to start living within its means is keeping interest rates low for families and businesses.

"That's why in the last two months alone the IMF, the IFS and the governor of the Bank of England have said the Government should stick to this plan.

"But Ed Balls has clearly learnt nothing from his time as Gordon Brown's right-man. He wants billions of pounds of more borrowing and more debt, exactly how Labour got us into this mess in the first place."