The threat to David Cameron's coalition government this week depends not on the new Labour leader, Ed Miliband. It depends on how far Miliband can exploit the politics of recession. The Tories can heap any amount of abuse on "Red Ed" – or now mildly pink Ed – but it will be just hot air if the economy returns to a halt under the weight of George Osborne's squeeze. Then the past, old Labour and New Labour, will be forgotten. During recession, the economy is the only game in town. During recession, oppositions hold the best cards, and new opposition leaders the best ones of all.

This week saw Osborne receive from the IMF the kind of school report that has the rest of the class retching in envy. His June budget was "essential to ensure debt sustainability" and "appropriately ambitious". His policy was "strong and credible", and should have the economy "on the mend". Indeed it "greatly reduces the risk of a costly loss of confidence in public finances". All that was missing was an IMF reference to the chancellor's handsome visage, sense of humour and delightful family. It was like Christopher Wren's Royal Society eulogy, written by Christopher Wren.

Yet every indicator suggests that growth next year will struggle even to reach 2%. The OECD is nervous. Mortgage lending has slumped, and the housing market has turned down after a brief recovery. Legal & General's economists talk of a "one in three" chance of double-dip recession. Even the IMF, covering its bets like a good economist, fears that consumer demand may after all be fragile and that "fiscal tightening will dampen short-term growth". It spoke of unspecified "major new shocks" and "headwinds", and said that these should be met by what it calls "nimbleness" on the part of the authorities.

Crucial to Osborne's political strategy is that the pain he is about to inflict on the public sector will be replaced and vindicated by a resurgence of the private sector. Consumers will start to spend, shops restock and firms rebuild inventories. Confidence will rise. Employees will be rehired and banks will resume their lending to one and all.

That is the plan. But if this does not happen soon, then capitalism can veer to the opposite extreme. As Keynes reiterated and ministers of all parties seem to forget, banks will not lend if demand is not there. Confidence wanes again, shops close and banks refuse to lend. The Bank of England can do all the "quantitative easing" it likes. It has tipped £200bn of paper money into bank balance sheets over the past 18 months, but this just stuffed the vaults and balance sheets of RBS, Lloyds and Barclays. There was a negligible rise in money in circulation.

In the 1970s Labour ministers thought the economy could be rescued by giving public money to trade unions. Now they (and Tories too) think it can be rescued by giving money to banks. Yet without a stimulus to demand, the banks do not lend. They set the windfall against their debts and pay themselves more bonuses. However much money Osborne, Gordon Brown and Alistair Darling may throw at their banking friends, it does not lead to a rise in consumer demand. Lending is not spending. Policy is illiterate.

A return to recession next year would be a disaster for Britain, when the rest of Europe is surging back to health. It would cheat Britons of another year of prosperity, inhibit the growth of tax revenue and thus obstruct the path to the government's own objective of fiscal balance. It would also be a political disaster for the coalition partners, left pleading their fiscal virtue while their poll ratings tumble. There are no prizes in politics for doing the right thing at the wrong time.

The blatant reality is that Britain's policymakers have had little clue as to how to avert recession. They have blown huge sums of money in the cause, and they have failed. The coalition's lodestar is to reduce the deficit enough to protect Britain's credit rating and thus cut the cost of debt. But that is a mere means to an end. A fixation with curing a deficit that impedes a return to growth ends by not curing the deficit. As Miliband said in one of his few substantive remarks today: "No plan for growth means no credible plan for deficit reduction."

Osborne's cuts programme is not in itself erroneous. Unless the bloated public sector can reduce its call on public funds, after the lurching up by some 10 percentage points of public spending as a proportion of GDP under Labour, Britain will return to the stagflation of the 1970s. Public wages are still rising, while private ones are falling, which must be unsustainable. The coalition's strongest suit is its readiness to challenge sacred cows – in defence, transport, welfare, law and order, higher education, whatever – as Labour never did. That discipline should continue.

This need not affect the celebrated fiscal balance if the squeeze on public spending is matched by liberality towards private spending. Indeed in recession, the overall impact of such changes should be expansionary. But Osborne is doing the opposite. He is not just cutting his own cloth, but that of consumer demand as well. He is raising VAT on the high street to 20% in January, thus directly impeding the scope of the private economy to take up the slack of the public one. He is squeezing everyone and everything.

At this point the coalition offers an open goal to Labour. Miliband can dodge the question of what he would cut by accusing Cameron and Osborne of jeopardising the recovery as a whole. Labour's instinct might be to cut public spending less but increase VAT, but Miliband need not make that choice. Osborne has allowed him to attack the government's economic policy across a wide front as recklessly anti-growth. If there is a return to recession next year, Labour will be able to blame the government and say it told the nation so.

Cameron will bang the drum next week for fiscal responsibility, but he had better keep his options open. The IMF bade his government to be "nimble", should there be the ghost of a return to recession on the horizon. His chancellor has dumped on him an almighty gamble, that he can postpone recovery to recover debt, but somehow recover national prosperity thereby in time for a 2015 election victory. With each scurrying cloud of gloom, this gamble is looking ever more risky.