There must be a plan B. Yesterday's revelation that Britain's economic growth slowed from 1.2% to just 0.8% in the last quarter clearly indicates a stall, when it should be accelerating with the rest of Europe. Despite earlier spin making this rise better than a predicted 0.4%, George Osborne's recovery faces a blazing amber light. With cuts in public spending ahead and a swingeing rise in VAT in January, he needs a course adjustment ready for action.

So tribal is British politics that a non-partisan response to this predicament is near impossible. One side maintains that the country must be purged of its crippling Labour debt with extreme dispatch, the other that the coalition is a bunch of neo-Thatcherite revivalists eager to bless the rich at the expense of the poor. You buy one ticket or the other.

I refuse. I happen to believe that Osborne's shifts in public spending between universality and means-testing are both radical and sensible. It was silly to present them as "fair", or "hurting the rich more than the poor", since restraining any welfare boom is bound to fall heaviest on existing recipients. Even so, cuts variously presented as the deepest since the 1980s, the 1930s or since time began will take most budgets back no further than a decade ago.

Any reasonable observer can both support the cuts and yet be alarmed at the prospect of a double-dip recession. We do not need a rabid Keynesian to tell us that cutting government spending by £81bn when consumer confidence is stagnant will surely make matters worse.

The government's economic policy is a seriously wild gamble, resting on two theses: one is that public spending cuts are vital to protect confidence in the government until its debt can be repaid; the other is that the negative impact of these cuts will be compensated by a surge in private sector activity.

Neither thesis is holding water. There is no evidence that Britain's heavy – and still rising – debt is unsustainable. Unlike his predecessors, Osborne has plotted a plausible route to a balanced budget. The American economist Paul Krugman points out in this week's New York Review of Books that bond markets are indulgent where governments act responsibly, lending freely at historically low interest rates. He writes: "These rates show that markets aren't worried that current budget deficits will undermine the long-run fiscal viability of governments." In other words, Osborne's credit is not seriously at doubt.

The more reason for putting it just a little at risk by reflating the economy when it is clearly needed. For another crucial group of players appears to have lost confidence – the homebuyers, shopkeepers, suppliers, manufacturers and local bank managers. Retail sales are stalled. Construction is half what it was a year ago. Mortgage lending is 7% down. Manufacturing slowed over the last quarter. After a brief restocking surge, trade has returned to moribund. People in public and private sectors, which nowadays interlink, are not spending but hoarding cash.

At Monday's Confederation of British Industry annual conference, David Cameron and business leaders claimed in unison that the private sector would "take up the slack" of some half a million workers ejected from the public sector. They cheered, but nobody could illustrate how that would happen. More worrying, Cameron and his trade minister, Vince Cable, resorted to the same desperate tactic that failed under Labour's Alistair Darling – pleading with banks to lend, even if nobody wants to borrow. Yesterday's Sun presented the prime minister in Kitchener pose under the crude order: "Lend, you bankers". He was said to have "piled pressure on the banks to start lending to businesses again" as companies were "desperate for credit to help them expand and create jobs".

Cameron studied economics and should know that banks do not create jobs, demand does. Exhortation is not policy. Just two years after the banks burned their fingers on bad debt, they are not going to lend recklessly to an economy from which Cameron is about to drain billions. Why should they gamble on expansion when Cameron is gambling on contraction?

The truth is that Britain's economic policymakers are as in thrall to bankers as their 1970s forerunners were to trade unionists. Because bankers got Britain into a mess, it is assumed they can be begged, bribed and cajoled to get Britain out of it. When it came to the unions, Margaret Thatcher had the right idea. If you want action, don't plead or whinge. Do it.

Over the last two years the banks have been bailed out with huge sums of money, yet have not been required to deliver anything in return. They have been told to stop paying bonuses but have paid them. They have been told to lend to businesses and have refused. Lending actually fell by £3.3bn last month. Banks were then given £200bn in quantitative easing by the Bank of England – supposedly to lend – and have stashed it in their vaults, balance sheets and bonuses. In effect, they have stolen it.

If you want to print money to revive the economy you put it directly into demand. You give it to real people. Instead we have the Bank of England governor, Mervyn King, admitting to Prospect magazine that he "believes" quantitative easing will work, two years after it has failed, "although I cannot tell you exactly when" or apparently how. Of the billions he has given the banks, not a penny appears to have reached the real economy. It must be the most glaring failure of modern economic policy. Even its architect, Alistair Darling, asks: "Where is this money?"

Whose confidence is more important, that of the bond market or of the British consumer? The answer is that the market seems fine, making a daily fortune trading debt. Meanwhile the consumers are at home, the high streets are boarded up and the January sales have started in October. The case for a massive boost to kick demand out of its trough is overwhelming, even if it postpones the moment of budgetary balance. Helicopter money should be dropped not on banks but on those most likely to spend it in the short term, mostly the poor. The best way to unlock a bank is to get the tills ringing.

George Osborne is a brave and innovative chancellor, contriving to recast the public sector at the same time as hauling the nation back from debt. A double-dip recession will kill him. He must have plan B. For starters, he should postpone the increase in VAT by one year.