The Labour party will raise the top rate of income tax back to 50p if it wins the next election, the shadow chancellor has announced.

The rate was applied on incomes above £150,000 until 2013, when it was reduced to 45p in the pound by the current government.

Ed Balls said that to help reduce the deficit he would reverse the decision made by the coalition. He told the annual Fabian Society conference in central London on Saturday morning that "those with the broadest shoulders" should bear a fairer share of the burden.

"The latest figures show that those earning over £150,000 paid almost £10bn more in tax in the three years when the 50p top rate of tax was in place than when the government conducted its assessment of the tax back in 2012," he said.

"When the deficit is still high, when tough times are now set to last well into the next parliament, when for ordinary families their real incomes are falling and taxes have risen, it cannot be right for David Cameron and George Osborne to have chosen to give the richest people in the country a huge tax cut."

Supporters of the reduction claimed that the lower rate brought in more money to the exchequer than the higher rate. However, Balls said the increase in the top rate was a more just way to reduce the deficit.

"That's why, for the next parliament, the next Labour government will reverse this government's top rate tax cut so we can finish the job of getting the deficit down and do it fairly," he said. "Reversing this unfair tax cut for the richest 1% of people in the country, and cutting the deficit in a fairer way."

Danny Alexander, chief secretary to the treasury, said the tax increase would undermine the foundations of Britain's economic recovery. "Labour's hypocrisy on taxation is breathtaking. In government they left a system full of loopholes for the wealthy to exploit," he said.

"Thanks to our action in government to raise capital gains tax, reduce pensions tax relief for the wealthiest and tackle tax avoidance, Lib Dems in government are raising more from those who have the most and making Britain more competitive. Reintroducing the 50p rate wouldn't help with either objective."

Business leaders and tax campaigners criticised Ball's announcement while unions offered their support. A Unite spokesman said: "The commitment to restore the 50p top rate of tax is a sign that a future Labour government understands the need for a fairer taxation system in this country."

But Simon Walker, director general of the Institute of Directors, said the tax rise would damage Labour's credibility in the eyes of the business community. "The 50p tax rate – actually 52p, because the last Labour government manipulated National Insurance contributions – greatly damaged Britain's claim to being seen as a low-tax economy and actually drove down total tax receipts. It was, and remains, an envy-driven political gesture designed solely to drive a wedge between voters.

"The Institute for Fiscal Studies warned when it was introduced that it could fail to boost total revenues. HMRC's own analysis reported that the underlying yield 'is much lower than originally forecast … and it is quite possible it could be negative'. As a tax it was self-defeating: it failed to raise enough money to pay for itself."

But Labour said the most recent figures released by Her Majesty's Revenue and Customs showed that top earners paid £9.5bn more in total income tax liabilities when the rate was set at 50p than previous analysis had shown.

Osborne, the chancellor, announced he was cutting the 50p rate in 2012, insisting it failed to bring in the revenue predicted. The new 45p rate came into effect last year.

Mark Littlewood, director general at the Institute of Economic Affairs, said: "Reintroducing the 50p top rate of income tax would be a disaster for both enterprise and economic growth. Those earning over £150,000 pay nearly 30% of all income tax and often create jobs, so we should be nurturing, not eroding, this tax base."