Gordon Brown "repeatedly and often angrily" rejected Treasury growth forecasts, leading his chancellor, Alistair Darling, to complain that the prime minister was being "ludicrously over-optimistic" about future tax receipts.

The controversy, detailed in Lord Mandelson's memoirs, The Third Man, published today, was part of a near two-year battle over how aggressively to tackle the deficit between Darling and Brown, who insisted that orthodox methods could not be applied to measuring it.

In a major row at the time of the March 2009 budget, Darling told the prime minister "the foundations of the budget had to be realistic – if they were not the markets would not buy it, the pound would come under pressure and Britain's credit status might be downgraded", according to Mandelson.

As Brown tried to change the growth forecasts, Darling told him he was being "ludicrously over-optimistic, not only about growth prospects, but also about Britain's ability to support such a large and expanding deficit".

Darling's warnings precisely echo the critique made by the coalition government, and also show why Treasury officials urged the incoming government to set up an independent Office of Budget Responsibility to oversee growth forecasts.

It is the first clear evidence that Brown saw it as permissible for politicians to revise the growth forecasts and so increase the likely tax receipts. Darling is thought to believe that forecasts beyond two years become highly speculative.

The book reveals that Brown saw himself in a battle with Treasury officials and regarded the pessimism of the growth forecasts as "part of a Treasury campaign to build up pressure for spending cuts".

Mandelson writes that Brown was "unbudgeable" over the subject. "In private, he accepted it was a major issue, but he believed the important argument to get across was about the need for the stimulus to grow our way out of recession."

At a later point Brown railed against any suggestion that he should drop his line of Labour investment versus Tory cuts, saying: "Cuts versus cuts will just kill us! We should not be in this place. We have to move to growth. Don't give me all this stuff about spending cuts."

He said he was sure he could have won the argument with a fair press about the need to rely on growth, adding: "Now it's useless. The Treasury will be turning the screw, they and others have set the terms of this argument and we have just followed them. We should not have gone down this course."

The argument reappeared at the time of the pre-budget report in December 2009, when Brown said: "By talking about future tax and spending, we would be doing the Tories' jobs for them." Mandelson writes: "We were deep in a pit of debt and still digging."

Darling, according to Mandelson, told Brown: "'We just cannot borrow more to pay for frontline services. If we are not credible in what we do and say, people will assume there will be more borrowing or huge tax rises to come.' Gordon countered that growth would reduce the deficit."

The cabinet eventually agreed a rise in national insurance to help plug some of the deficit, but Mandelson concluded: "The media immediately recognised there was an obvious elephantine flaw in the PBR – there was not just enough tax or enough savings, unless we were contemplating sizeable cuts in spending after the election which we were not owning up to." He concluded: "Alastair had been right – our package had failed to convince."

As the row led to a serious deterioration in relations between the two men, Mandelson wrote to Brown over Christmas urging him once again to change the argument. "As long as no one believed us on the public finances, they would not believe us on anything else." He was angered by Brown's inflexibility, writing: "It seems to me that once you have made up your mind, it is hard to discuss things frankly and collectively."

During these discussions Tony Blair reminded Mandelson that Brown had resisted his own attempt in the final days of his premiership to conduct a fundamental spending review. Blair recalled: "Gordon had resisted the premise of the initiative that the era of spending increases were over, and that the whole basis of government had to be recalibrated."

The disagreement spilled over into a dispute about the party's campaign strategy between David Muir, Brown's chief pollster, and Philip Gould, an adviser to Blair brought back to help the election campaign. Muir argued that the campaign should be based on Cameron's threat to working people's economic interests, while Gould argued that Labour needed to give a clearer message about the future .

Mandelson also reveals he disapproved of the Labour manifesto drawn up by Ed Miliband, now a candidate for the Labour leadership. "It seemed to have been road-tested more with Guardian columnists than Philip's groups of voters," he writes. "It adopted radical rhetoric, but when it was boiled down it was vague and appeared to avoid any hard choices."

He reveals that during the campaign Harriet Harman, the deputy Labour leader, urged him to "send up some flares on fairness" by attacking bankers.

Mandelson describes Brown's chaotic working style, writing: "No one could ever say that Gordon did not work hard, but he and those working for him never created a system to handle this disjointed express train flow of work. It required strong personal discipline, and concentration by the prime minister on many things at once, with clear decisions taken in good time."

He likens him to a short-tempered editor on deadline, shouting, cursing and barking orders.