George Osborne has been warned that his policies to boost the economy will lead to ballooning household debt.

The Institute for Public Policy and Research (IPPR), the left-of-centre thinktank, said the chancellor's attempts to increase business lending had been a failure and that by resorting to policies such as Help to Buy in the housing market he risked undermining the recent recovery.

The IPPR's chief economist, Tony Dolphin, said: "A massive build-up in household debt before 2008 contributed to the depth of the recession in the UK. George Osborne was right when he said that we can no longer rely on ever-higher levels of debt for growth.

"It is an indictment of the failure of his attempts to boost business investment spending that, rather than encouraging a rebalancing of the economy, he now has to resort to policies that will increase its imbalances."

The strength of the bounce-back in recent months has taken many forecasters by surprise and growth predictions for 2013 and 2014 have been revised upwards. In December, the independent Office for Budget Responsibility (OBR) forecast the UK economy would grow by 2.4% next year, up from its prediction of 1.8% in March.

But in a new-year message, Dolphin said there was "still plenty of cause for alarm" and warned the UK had not learned the lessons of the last recession.

Dolphin said current positive signs for the economy were being undermined by high youth unemployment, low rates of investment by businesses and poor export performance. Regional imbalances have increased, he said, and plunging productivity levels, falling wages and the large proportion of low-skilled workers "should tell us that the 25-year experiment with free-market capitalism ... has failed".

He said the government was wrong to be content with an economic system "that has provided a favourable outcome only for a small elite", and called on it to adopt an economic strategy that is based on improving the UK's long-term economic performance rather than creating short-term gains through ever-rising household debt.

In November, the Bank of England said household debt had reached a record level in absolute numbers, with borrowing including mortgages hitting £1.43tn – meaning the average adult in the UK owes more than £28,000.

The majority is mortgage debt, which has been rising with increasing house prices, but credit card borrowing and other unsecured lending, which had fallen since the recession, have also started to increase.

The IPPR said that although the debt ratio was not expected to return to its previous peak of 170% within the next five years, OBR figures suggested that by 2018 it would be back up to 160%.

Dolphin warned the Help to Buy scheme, which allows home buyers to get on the housing ladder with a 5% deposit, risked "pumping up a fresh housing bubble" and would mean that for many young people "concerns about large deposits are replaced with ones about unaffordable monthly repayments and unprecedented levels of debt".

He said that although Osborne had promised a "march of the makers" in his 2011 budget, companies had been reluctant to increase exports or investment spending, which was still 24% below its level at the end of 2007.

"Strong growth in the short term does not mean that structural weaknesses in the UK economy that became more evident during the 'Great Recession' have been eliminated," said Dolphin. "Unless we move to adopt a new economic model, the recovery will prove unsustainable and bittersweet for those who do not benefit from it before it is extinguished."