George Osborne has insisted his plan is working, telling business leaders "now is not the time to lose our nerve".
Spending more to rejuvenate the UK's fortunes is "patently ludicrous" and would set the recovery back, the Chancellor added.
Addressing the CBI annual dinner at Grosvenor House, he also rubbished Labour calls for a temporary VAT cut, claiming the figures do not "stack up".
"My message to the business community and to the country is this: we have a clear economic plan," he said.
"Our plan is working. 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."
Last month IMF chief economist Olivier Blanchard warned that Mr Osborne was "playing with fire" if he continued with his current deficit reduction plan and the organisation is set to issue the government with advice following extensive talks in London this month.
But the Chancellor said the Government would not deviate from its "credible" approach, which has seen the deficit cut by a third.
He warned easing fiscal policy to fuel growth would be "mistaken" and suggested any sense the UK was going to "print its way out of trouble" would spark a "catastrophic" response in the markets that would hit families in their pockets.
"Are those advocating looser fiscal policy really suggesting we should set out to increase our deficit year on year when it is still larger than when Britain went to the IMF in 1976 and one of the highest in the western world today?
"And those who argue that because the UK has its own central bank and the ability to print money the UK cannot lose market confidence are dangerously wrong.
"The UK's own history shows it to be false."
He added: "If financial markets sensed that the UK was going to print its way out of trouble, the response in the markets would be catastrophic.
"The people who would pay the price are the millions employed by the companies represented in this room and the millions of families who would face higher mortgage rates."
The Chancellor's speech came after Sir Mervyn King gave a glimmer of hope in his last economic forecast as governor of the Bank of England.
In the quarterly inflation report he said growth will be a "little stronger" than previously hoped, setting the UK on course for a "modest and sustained" recovery. The economy should expand by 0.5% in the second quarter of this year, he said, while inflation will not surge as much as feared.
The Chancellor criticised calls for increased spending and took a swipe at Labour, telling the CBI: "Those who advocate more spending have had to admit that it would increase borrowing.
"But, they say, it would lead to lower borrowing after that. We would borrow more to borrow less, they say.
"Once you unpack the assumptions required for this to be true, this argument becomes patently ludicrous."
"Let's take the idea that a temporary VAT cut would eventually reduce borrowing," he told the CBI.
"This would require the multiplier effect of a VAT cut on the economy to be seven times higher than the independent OBR estimate.
"It simply doesn't stack up.
"The truth is that while the detail and credibility of our deficit plan stands out internationally, our pace of consolidation is in the middle of the pack.
"We are reducing the structural deficit by about 1% of GDP a year - in line with other developed economies, and less than the US."
Shadow Treasury minister Chris Leslie said: "George Osborne is in total denial about the failure of his economic plan.
"He has now delivered the slowest recovery for 100 years, falling living standards and rising unemployment.
|And borrowing is set to be £245 billion more than planned to pay for the costs of this economic failure.
"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.
"Even the IMF has warned the Chancellor he is 'playing with fire' by sticking to the same failing policies and called for temporary tax cuts and greater infrastructure investment to boost the economy.
"It's time George Osborne listened before any more long-term damage is done."