Vince Cable has warned that the political class has not yet prepared the public for the scale of the underlying problems facing the UK economy and the coming squeeze on living standards.

In a frank interview with the Guardian the business secretary repeatedly referred to the time and pain that will be needed to restructure what he regards as a broken economic model.

"It is a challenge to us to communicate it better. I don't think it is understood that the British economy declined 6 or 7% – [that is] 10% below trend," Cable said. "We are actually a poorer country, mainly because of the banking crash, the recession that followed it and partly due to the squeeze we are now under from the changing balance of the world economy."

He argued: "Britain is no longer one of the world's price setters. We take our prices from international commodity markets driven by China and India. That is something we have got to live with and adjust to. It is painful. It is a challenge to us in government to explain it. The political class as a whole is not preparing the public for how massive the problem is."

He expresses frustration that "the debate about the economy is in the wrong place," partly blaming Labour for still being in a state of denial that its golden decade of growth had been built on an unsustainable model of financial services.

"There is not a sustained critique, pressure or argument from the progressive wing of politics. Ultimately it comes back to this defensiveness and an unwillingness to accept that Britain was operating a model that failed … it makes it more difficult for us to get through to the public about the scale of the problem. That is to everyone's loss."

He said: "As a country we are going to have to go through some very big major structural changes, but if the dominant debate is 'Well, what is the problem? Why are we all doing this stuff? It is not really necessary.' Of course it makes it more difficult."

Cable, one of five Liberal Democrat ministers in the cabinet, said it was realistic for the coalition to eradicate the structural deficit by the end of this parliament, adding "our credibility hinges on it".

But he does not convey optimism about growth in the short term. "The fact is that we are now having to get used perhaps to lower growth and a gradual process of building the economy up again."

He said: "We have had a very, very profound crisis which is going to take a long time to dig out of. It is about the deficit, but that is only one of the symptoms. We had the complete collapse of a model based on consumer spending, a housing bubble, an overweight banking system – three banks each of them with a balance sheet larger than the British economy. It was a disaster waiting to happen and it did happen. It has done profound damage and it is damage that is going to last a long time."

He predicted the impact on people's lives will not come primarily from government spending cuts, but the squeeze in living standards caused by world prices and a 20% devaluation of sterling against other major currencies.

Without questioning the growth forecasts from the Office for Budget Responsibility, he stressed the uncertainty of external factors. "We cannot predict what is going to happen in the eurozone, and how that is going to impact on us, and we cannot predict what is going to happen to oil prices."

Cable recently wrote that "economic policymaking is like driving a car with an opaque windscreen, a large rearview mirror and poor brakes", and told the Guardian the metaphor applied to Mervyn King, the governor of the Bank of England, as he made the big calls on monetary policy designed to spur growth.

More broadly, he said: "The danger is over-confidence — the belief that the government can control everything in the economy. Governments cannot. Economic management is difficult."

He also denied the government is locked into a cycle of more spending cuts if growth slows. He said: "What is not often acknowledged is that there is a lot of flexibility built into current policy. The main element of flexibility is in monetary policy and the second is the basic Keynesian stabilisers. That is the way the government is functioning. We are not trying to maintain budget balance come what may. If the economy slows down, the deficit temporarily has to rise to take account of cyclical change, flexibility is built in."

Cable expressed disappointment that tribalism has returned to politics in the wake of the AV referendum, admitting it will be difficult for his party in the short term. But he claimed the change could be turned to Nick Clegg's advantage.

"There is now a large constituency of people out there who, for want of a better word, are de-tribalised, who hate the ya-boo, left-right debate who are looking for a home, and in a way that is our constituency. Blair appealed to that [group] a decade ago, successfully."

He said despite the vitriol directed at his party during the local elections, it had retained a base of 15% from which it can build.