George Osborne admitted he would miss his annual borrowing target by £5 billion but said voters should let him "finish the job" of getting the books in order.
Delivering his last Autumn Statement before the general election on Wednesday, the chancellor insisted that the public finances would be less badly hit than expected by disappointing income tax receipts, but admitted that the deficit was not falling as fast as he had hoped.
Osborne told MPs that that borrowing was estimated be £91.3 billion this year - rather than the £86.4 billion the Office for Budget Responsibility previously expected.
The Chancellor's admission that national debt, which was predicted to be at 74% of GDP, was now set to be at 81% was proof of a "comprehensive economic failure", a senior Labour MP said.
"Now Britain faces a choice," Osborne told the Commons. "Do we squander the economic security we have gained, go back to the disastrous decisions on spending and borrowing and welfare that got us into this mess?
"Or do we finish the job - and go on building the secure economy that works for everyone. I say: we stay the course. We stay on course to prosperity."
Osborne also signalled that public sector workers will be squeezed further, risking fresh clashes with the trade unions as he told MPs that limiting wage rises would continue into the next Parliament.
Unions reacted with anger to the announcement, pointing out that disputes over public sector pay are still raging.
Hundreds of thousands of health workers are embroiled in a bitter row after a recommended 1% pay rise for all NHS staff was rejected by the Coalition. A series of strikes have been held, with more likely in the new year.
Public and Commercial Services union general secretary Mark Serwotka said: "The legacy of this Government's obsession with austerity is a broken economy where low pay and insecure work are rife, meaning we have economic growth but falling living standards and rising employment but falling tax revenues.
"Instead of targeting low-paying employers, ministers have fuelled a deeply unpleasant and dangerous hate campaign against migrants and people who rely social security, blaming the least culpable for the Government's failures."
Osborne said the OBR growth estimates for this year - revised upwards from 2.7% to 3% - showed the coalition's pace of fiscal consolidation was right.
"Now there are those who say we should cut even faster, and those who say we should cut more slowly. But we've got the pace right - as clearly demonstrated by the fact that our economy is growing faster than almost any other.
"And because of careful management, we can afford to put part of that underspend money into our National Health Service to cope with the pressures it faces."
Labour's shadow chancellor Ed Balls told MPs in response: “We all know he’s changed the way he’s styled his hair, but he can’t brush away the facts, Mr Speaker... for all his strutting, for all his preening, for all his claims to fix the economy, he promised to make people better off, working people are worse off;... every target missed, every test failed, every promise broken.
“We need the recovery for the many, not just the few... That is the Autumn Statement we needed; it will take a Labour government to deliver it. “
Osborne said 500,000 jobs had been created over the past year, and inflation and the deficit was falling. He dismissed suggestions that many of the posts created were part time, insisting 85% were full time, and telling MPs that they are also being generated fastest in Scotland and the North of England.
Green Party Leader Natalie Bennett said in a statement: "Chancellor George Osborne is continuing with his clearly false diagnosis of the source of Britain's economic problems, so unsurprisingly his prescription is not going to cure the patient.
"Osborne’s suggestion that 'disastrous decisions on spending and borrowing and welfare that got us into this mess' are demonstrably false. What got us into 'this mess' is the fraud, errors and mismanagement of the financial sector. Urgent action is needed is to tackle the still out-of-control sector, the still too-big-to-fail banks and their hulking dominance of our imbalanced economy.
"What the coalition government needs to do is stop making the poor, the disadvantaged and the young pay for those bankers' errors, and rebalance the economy so that it starts to provide jobs that workers can build a life on, while paying decent benefits to everyone who needs them.”
SNP Deputy Leader and Treasury spokesman Stewart Hosie MP said: “Today’s statement was merely a continuation of a failed austerity programme from an austerity government which has failed to deliver the growth the economy needs and which has set out to balance the books on the back of the poor.
“Remember what George Osborne promised when the Tories came to power. He has failed to meet even one of the targets he set for himself.
“Tory policy has strangled the recovery and with £75 billion of cuts to come we are on track for a decade of austerity. Austerity has failed."