The squeeze on public spending should continue and result in a permanently slimmed-down public sector, David Cameron said on Monday night as he staked out economic battle-lines with Labour ahead of the election.

Delivering the annual Lord Mayor’s Banquet speech in the Guildhall, he signalled that austerity measures would continue after 2015 if the Conservatives won the next election.

Mr Cameron’s comments were a direct riposte to Labour’s repeated focus in recent months on continued falls in living standards as incomes lag behind inflation.

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He ridiculed the suggestion that the way to put more cash in the pockets of the public was for “the state to spend more and more taxpayers’ money”.

The Prime Minister said the biggest threat to the cost of living was if Britain allowed its debts to get out of control, driving up interest and mortgage rates.

Cutting the deficit was not just about “difficult decisions on public spending”, he said as he outlined a vision of a heavily reduced public sector.

“It also means something more profound, it means building a leaner, more efficient state. We need to do more with less. Not just now, but permanently,” the Prime Minister said.

He also took a gentle swipe at the Archbishop of Canterbury, the Most Rev Justin Welby, who was sitting alongside him. Dr Welby has raised fears over the social impact of cuts to benefit payments.

But Mr Cameron said: “At a time when family budgets are tight, it is really worth remembering that this spending comes out of the pockets of the same taxpayers whose living standards we want to see improve.

“I hope the Archbishop of Canterbury will forgive me for saying - it’s not robbing Peter to pay Paul, but rather robbing Peter to pay Peter.”

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Mr Cameron, who announced plans to lead a trade delegation to China next month, argued Britain had to undergo a “fundamental culture change” if it was to compete in the “global race”.

He described it as a “culture that’s on the side of those who work hard, which values that typically British, entrepreneurial, buccaneering spirit, and which rewards people with the ambition to make things, sell things and create jobs for others”.

Arguing that Britain could not “try and rebuild the same type of economy we had before the crash”, he said the country could not afford to allow thousands of children to leave school without any qualifications.

Nor could it succeed in the long-term if “capable people are paid to stay idle and out of work”. Mr Cameron insisted: “We are putting an end to the poverty and wealth traps that have plagued our welfare system for too long”.

And he argued that major infrastructure projects, such as the planned High Speed 2 rail line between London, the Midlands and the North of England, proved the Government had a “plan for the long-term”.

In a speech a Tuesday Ed Miliband, the Labour leader, will accuse Mr Cameron of failing to equip young people with crucial hi-tech skills.

“IT apprenticeships have fallen from 18,520 to 13,750 in the last year alone, leaving businesses having to recruit workers from abroad.

“Businesses need to be able to recruit talent and plug the skill gaps by hiring from overseas. But both they and government have a responsibility to ensure that in the future we have the skills needed for Britain to succeed in the future. “

Mr Miliband will announce that the former television presenter, Maggie Philbin, will head a digital skills taskforce to draw up recommendations for tackling skills shortages.