Now we know for sure George Osborne’s economic plan has failed, even on its own account. For all the self-congratulation about credit-fuelled growth, the recession in wages goes on. Four years into the coalition, most people’s living standards are still falling. Last week it seemed as though pay might have finally overtaken prices. But yesterday’s figures showed that real earnings fell by 1.6% over the past year. That continues the longest drop, of seven consecutive years, since records began in Victorian times.

The fall in living standards is greater still for the poorest, who effectively suffer higher inflation. Add in the fact that business investment as a share of national income and productivity are still declining, and no wonder David Cameron’s red lights are flashing. Of course the Tories like to boast about employment growth. But since only one in 40 of the new jobs are permanent, the number of people in enforced part-time work has doubled to 1.3 million, and there has been an explosion in artificial self-employment, the experience on the ground is something else entirely.

The most spectacular failure, however, is in the government’s central economic objective – for which all the pain was supposed to have been endured. After four years in office, the budget deficit and debt are growing, when the original plan had the books as good as balanced by now. The government’s core policy has failed on its own terms – let alone anyone else’s.

A crucial factor in that failure is falling wages and job insecurity. Cuts in real pay and growing low-wage employment have meant lower tax receipts and greater demand for benefits. Almost all the pain of benefit cuts for the most vulnerable has come to nought.

If cuts aren’t working, and low pay and insecurity are shrinking tax revenues and boosting benefit costs, you might think that would be cause for a change of direction. Not a bit of it: £50bn more cuts are lined up for the next parliament – and the government is doing everything to drive down wages and job security still further.

Take compulsory unpaid labour – or workfare as it’s politely known. Under the punitive regime of Iain Duncan Smith at the Department of Work and Pensions, hundreds of thousands are being dragooned to work for free, often for months at a time, for private companies, local authorities and charities. There are now six different schemes under which claimants can be coerced into unpaid work under threat of benefit “sanctions” – imposed on 900,000 jobseeker’s allowance claimants last year, often on bizarre and arbitrary pretexts.

Councils helped themselves to half-a-million hours of unpaid labour in the same period, as did scores of household-name companies. Not only do such “placements” do little to help the unemployed into work, they are clearly replacing and undercutting paid employees. There is now a determined backlash. In Mortherwell in Scotland, a man who refused an instruction from his local jobcentre to work for his previous employer for six months without pay had his dole money stopped as punishment. Last week, the firm pulled out of the scheme after it was the target of “slave labour” protests.

The combination of savage benefit cuts and sanctions has driven the growth of hunger in Cameron’s Britain – and the rise of food banks, which supported more than 900,000 people in 2013. That has the advantage for the Conservatives of taking the burden of the hungry off the public purse, shrinking the state and preparing the poor for a harsher labour market in the process. That’s the casualised, zero-hours, agency-working world the government is fostering so enthusiastically. In case anyone doubted it, whenever renegotiation of Britain’s membership of the EU comes up, the limited employment protection offered by Brussels directives is the first item Tory ministers want to ditch.

This week Ed Miliband singled out the rapacious Sports Direct, which employs most of its shop workforce on zero-hours contracts, for its “Victorian practices”. Such exploitation would be banned by a Labour government, he said. At Sports Direct’s main warehouse, in Derbyshire, however, the company relies on agency working for its 5,000-strong workforce. In a grim symbol of post-industrial Britain’s race to the bottom, the plant is built on the site of the former Shirebrook colliery, which closed in the early 1990s.

Most of the workers are east European migrants – on rock-bottom pay and effectively without employment rights – as is the case in the largest private employer in Newark in neighbouring Nottinghamshire. “They’re mostly too scared to speak to us,” a local union organiser says, “and it’s becoming a benchmark for other employers.”

In the runup to today’s byelection in Rochester, Labour promised to extend the period before EU migrant workers could claim out-of-work benefits, while the Ukip favourite, Mark Reckless, appeared to endorse migrant deportation – while accusing the Tories of pandering to the BNP.

In reality, fewer than 3% of EU migrants claim out-of-work benefits, while any party serious about halting downward pressure on wages from the exploitation of migrant workers would put a crackdown on the full range of abuses at Shirebrook and Newark centre stage. It’s the fall in living standards and the impact of austerity that has recruited working-class voters to Ukip.

But far from trying to relieve that pressure, the government is doing everything to encourage it. How can that be explained, when falling incomes are derailing Osborne’s plan, boosting the deficit and draining support from the Conservatives?

Part of the answer is that austerity isn’t only – or even mainly – about balancing the books. It’s also about restoring profitability and the whiphand to the corporate world, which six years after the crash is still sitting on a £500bn cash mountain and won’t invest on the scale needed for a real recovery until it’s convinced of secure returns.

So wages and taxes are cut to coax the corporate giants – transferring wealth from the poor to the rich – even though credit-cushioned wage stagnation helped trigger the crisis in the first place. That contradiction at the heart of austerity and the havoc it’s wreaking is why the alternative – ditching a broken model for a public investment-led reconstruction of the economy – is an ever-more pressing necessity.