Ed Balls tried on Thursday night to spike the coalition's guns on the eve of the increase in the personal tax allowance to £10,000 by releasing figures showing that the average family will be worse off by £974 a year by the time of next year's election.

As David Cameron hailed Britain's recovery from a "long, deep and difficult recession", the shadow chancellor accused the coalition of compounding the financial pressure on people with tax changes which have involved "giving with one hand but taking away much more with the other".

Ed Miliband reinforced the message from Balls by telling the Guardian that next year's general election is "our election to win" on the grounds that the Conservatives do not understand the impact of the cost of living crisis as wages have risen below the rate of inflation.

The Labour leader said: "This is going to be a close election. I have always known this is going to be a close election. It is our election to win because I don't believe people think this government is on their side or is going to address some profound questions that people have in their lives."

Miliband accused David Cameron of taking a fatalist view, in which millions of people are condemned to low wages, as new figures showed the overall impact of the government's tax changes between 2010 and April 2015 would leave the average household worse off by £974 a year from April next year. The figures, which were complied by the impartial Institute for Fiscal Studies in the aftermath of the budget, have been analysed by Labour.

Families with children will be hit even harder. A couple with children, with one parent working, will be worse off by £3,720. A couple with children, with both parents working, will be worse off by £2,073.

Balls said the government is failing to acknowledge the impact of all its tax changes. The IFS figures include the affect of the VAT rise from 17.5% to 20% in January 2011, cuts in tax credits and child benefit and the increase in the personal tax allowance.

The shadow chancellor said: "David Cameron is trying to tell working people they are better off, but he's not fooling anybody. Taking into account all the changes to tax and benefits since 2010, families will be almost £1,000 a year worse off on average by the time of the next election In other words, the Tories are giving with one hand but taking away much more with the other. So whatever out of touch claims David Cameron and George Osborne try to make, these independent figures are clear: hard-working people are worse off under the Tories."

Labour's interpretation is designed to take the shine off the increase in the personal tax allowance to £10,000 at the start of the new tax year this weekend. George Osborne announced in the budget that it will increase to £10,500 next year – a month before the general election – as part of a coalition drive to ease the pressure on low earners.

Miliband said that the cost of living crisis will be the defining issue of the general election, telling the Guardian: "This cost of living crisis is not some just some kind of Westminster slogan. It is what people feel in their daily lives, it is about people working 60 hours a week, it is about people on zero hours contracts and insecure jobs, it is about people thinking their kids are going to have a worse life than them.

"There'll be two different views about this. One set of people will say: 'Ah well, that is just inevitable, there are global trends that mean that is going to happen. People are fated to that kind of more and more difficult life.' There is another view which says politics can change that. By reforming our economy, changing the way our economy works, having a government that is on people's side you can lean against these big forces of inequality that are there in our country … That is more relevant to this time than perhaps to any other time in recent generations."

The prime minister acknowledged that people had yet to see the benefits of the improving economy in their pay packets.

Speaking during a regional tour, designed to highlight the increase in jobs, Cameron said: "The truth of the matter is this – the British economy is improving. We have got 1.3 million more people in work, we have got more businesses in our country. That is good news.

"But we are recovering from a long, deep and difficult recession, and it does take time before people really feel the effects of an economic recovery. We have seen this recovery so far come in jobs and more people getting into work, rather than in an increase in wages. I think over time wages will increase. We are helping people by cutting their taxes, so this week you can earn £10,000 a year before you start paying income tax.

"But if your question is, 'Does it take time for people to really feel a recovery?', yes, of course it does. All the more reason for sticking to our long-term economic plan and not going back to the bad old days of more borrowing, more spending and more debt."

A treasury source dismissed the Labour analysis. The source said: "The figures actually show the poorest households gain from the tax and benefit changes. It is the richest who pay the most. To use an average figure is disingenuous which is probably why Labour didn't release the full facts."