Outside the more mysteriously funded rightwing thinktanks, everyone agrees that we have become too unequal a society. Even those who think morality is for softies have come to recognise the economic case for greater equality.

Inequality drove the 2008 crash. Its roots were in the banks’ belief that they could remove the risk from lending to people whose stagnating wages meant they could not afford the repayments. And inequality lies behind the chancellor’s failure to meet his deficit target. His problem is not a lack of deep cuts, but new jobs that are mostly low-paid and generate little tax.

And with the Office for Budget Responsibility saying that even the subdued growth it expects will be based on increased household borrowing, it is looking like deja vu all over again.

We can even put numbers on this. The Organisation for Economic Co-operation and Development estimates that rising inequality between 1990 and 2010 cost the UK nine percentage points of economic growth. Across OECD members the richest 10% earn 9.5 times more than the poorest, up from seven times in the 1980s. Top UK directors now earn 120 times the average wage, up from 45 times in 1998. Britain’s highest-paid director earned a year’s worth of the living wage in less than an hour.

But there is little agreement about what to do. When those who stand to lose the most have the tightest grip on power, it will not be easy. “What is it about owning a big house in London that makes you so opposed to the mansion tax?” as every celebrity opponent should be asked.

We should start with pay. We should be more ambitious about the minimum wage, and in sectors of the economy where employers can afford more, there should be a higher floor. We can use the power of government procurement, responsible investment and consumer action to make not being a living-wage employer the difficult and controversial choice. That would save the taxpayer a good slice of the billions spent on in-work benefits that subsidise low pay.

But even with higher wages we would still need redistribution through in-work support for those on lower incomes. The wage on which a fit single person can live will never be enough for a single parent caring for a disabled child.

The chancellor knows many voters replay Benefits Street stereotypes when they hear the word welfare. But as benefits for the unemployed take just 2% of welfare, and protected pensioner spending takes 55%, he can only make his cuts by hitting low-paid workers hard. In his libertarian vision, the working poor will neither pay income tax nor get state top-ups as we return to a 1930s, pre-NHS, pre-welfare state country.

Higher wages and redistribution through using tax and benefits to take from the rich and give to the rest work together. Better pay has a twofold effect: reducing the need for in-work support and generating the tax to pay for more redistribution. At the top end, we should cut excess executive pay, not simply slow its increase. We should end the cosy closed shop of remuneration committees by compelling employee representation. By taxing excess pay and bonuses as if they were profits, you do not just raise the corporation tax take, but make shareholders think harder about executive pay.

But what about the vast bulk of the workforce who are neither rich nor on poverty pay? The average full-time wage is now worth £2,500 less than it was in 2010. The first step is an economic policy that supports good jobs and growth. Yet George Osborne wants the opposite. His rapid post-election cuts would not just rip our social fabric but slow the economy. Taking that much demand out of a peacetime economy year after year has not happened since the 1920s “Geddes axe”, which not only failed to cut the deficit, but drove the Great Depression.

We need more demand targeted at good jobs through industrial policy, decarbonisation, investment in skills and regional devolution of spending – not cuts. Yet even this will not guarantee fair wages within companies. This is why the International Monetary Fund says that we need to extend collective bargaining. Interestingly the author of the key IMF paper, Michael Kumhof, has been brought to the Bank of England by Mark Carney.

The chancellor disagrees on this too. The Conservative party manifesto will pledge restrictions on trade union ballots that are so draconian they would effectively make legal strikes impossible and could criminalise pickets. Shifting the balance of power will weaken every worker’s hand – whether or not they are in a union – as collective bargaining plays a key role in setting wage rates across many sectors.

In the 1980s the right won the intellectual debate with its small-state, let-the-markets-rip ethos. That model broke in 2008. But the surprisingly extreme autumn statement offers economic self-harm – cuts that will depress growth, keep wages down, reduce the tax take and thus increase the deficit, which in turn will require more cuts and start the whole miserable process all over again.

Our task is to reset the objectives of economic policy. A real recovery should mean rising living standards, decent work and reduced inequality. That does not just give us a popular and moral purpose, but offers a virtuous circle that will heal public finances and deal with the deficit – not as a fiscal straitjacket but as the healthy product of a fairer economy that works for all.

Frances O’Grady is general secretary of the Trades Union Congress