Richard Branson, whose support for Tory economic plans was enthusiastically trumpeted by George Osborne in the runup to the last general election, has dramatically turned on the coalition for failing to promote growth.

Britain's most famous business tycoon said ministers' rhetoric on reinvigorating the economy had not been matched by action. He demanded that the government show more support for small and medium businesses which were "the engines of any healthy economy".

In an outspoken intervention, the founder and chairman of the Virgin Group called for a renewed focus from ministers on bringing unemployment down and promoting the country's entrepreneurial spirit.

Branson told the Observer: "To get that growth, we need to get behind the small and medium-sized businesses that are the engines of any healthy economy. They need investment and finance, and that comes from the big banks. The politicians talk of encouraging lending; we need action to match that rhetoric."

The comments come as Whitehall sources said former investment banker David Laws, who was forced to resign as chief secretary to the Treasury over an expenses scandal two years ago, is now being lined up to come back into the government in an imminent reshuffle to beef up its economic credentials.

As a minister in the Cabinet Office the Liberal Democrat MP would sit in on cabinet meetings and have a "roving role" in government. It is hoped he will be able to drive forward policies to drag Britain's economy out of the doldrums.

However, Branson's criticism will come as a hammer blow to the government after a week in which figures showed that the UK economy shrank by 0.3% in the first three months of the year, compared to the 0.2% predicted by the Office for National Statistics.

Two years ago, in the runup to the 2010 general election, Osborne, then the shadow chancellor, hailed support from Branson for his austerity policies as a sign that big business was backing the Conservative cause, adding: "As Britain's best-known entrepreneur, he knows more about creating jobs and building an economic recovery than the entire Labour cabinet put together."

But last night Branson was one of a number of major British business figures – including Martin Sorrell the chief executive of WPP, the largest advertising group in the world – to demand a renewed focus on promoting growth in the UK.

Branson said: "Government needs to focus on smaller businesses and find ways of making it easier to set up a business in the UK. It should look at reducing business rates and regulation on small and start-up companies.

"It is these costs and rules that are hampering employment growth. It could look at introducing policies such as a national insurance holiday on hiring people for the first two years.

"We need to encourage more entrepreneurship from the next generation – and focus on giving them the basic business and money-management skills as part of the schools curriculum."

Sorrell, who endorsed the Conservatives at the last general election, added that ministers seemed to have been blown off course.

He said: "The problem is the government has no strategy. The government seem to have been blown off course by events, which is understandable, but they seem to be looking at the short term too much, which is a problem. Vince Cable [the business secretary] was right when he said what we need is a plan.

"The fact is, they [the government] haven't cut spending, they just reduced the rate of increase. When will this mythology that we have cut spending cease? It seems like a convenient excuse at the moment."

Luke Johnson, a former chairman of Channel 4 and Pizza Express, added that even on its own terms of cutting spending, the government was failing.

He said: "There are very few, if any, short-term fixes to boost growth. What matters is consistency and rational thinking, rather than knee-jerk reactions.

The latest quarterly figures on government expenditure show they haven't been cutting spending at all, so the programme of austerity is a bit of a myth to date."