Over a million youngsters unemployed. Joblessness across Britain at its highest since John Major was in No 10. Bank of England forecasts halved so that it now expects GDP to grow a dismal 1% next year. Yesterday's news on the economy may have been depressing and worrying; but it was hardly surprising. Put bluntly, the coalition took a huge economic gamble when it came to power last May. It set out plans to cut public spending hard and fast and bet that the economy would not be too severely damaged as a result. This was not a daft exercise: there were legitimate worries about the need to preserve national credibility in the sovereign debt markets, although David Cameron and George Osborne were stupid to liken Britain to Greece. But many others warned that economic conditions were too choppy to embark on a policy of slash and burn – and that the result would be to push companies out of business and workers on to the dole .

Enough time has now elapsed to judge that the critics were right and the prime minister was wrong. When the coalition took over, unemployment was falling, now it is going up – sharply. Business and consumer confidence both collapsed upon Mr Cameron moving into Downing Street. And the economy has flatlined. Under Labour, the UK pulled back from the brink of an economic depression and enjoyed a tepid recovery. The stimulus measures were too small – but there was still a turnaround. Mr Osborne has effectively trashed this recovery. It is no good for the chancellor and employment minister Chris Grayling to blame this latest set of bad numbers on the eurozone crisis – to claim that Angela Merkel ate their fiscal homework. As the Lib Dem Matthew Oakeshott rightly pointed out yesterday, joblessness is what economists term a lagging indicator – employers tend to recruit when the economy is humming along, not when things look dicey. In any case, yesterday's official breakdown of public versus private sector recruitment only goes up to June – well before the eurozone crisis reached its latest dramatic climax. They make grim refutation of Mr Osborne's claim that if the state cuts back, private business will pick up the slack: 111,000 jobs were shed by the public sector in the three months to June, while 41,000 were created in the private sector.

The big question is what happens now. The government strategy is clear. Rhetorically, it is to blame this mess on the euro. Economically, it is to hope that the Bank of England keeps pumping money into the financial markets – and given yesterday's gloominess from Mervyn King, he may well launch a third round of quantitative easing before spring. Politically, the coalition will talk up their growth plans, even though they seem largely to consist of structural reforms and privately funded investment projects that will pay off sometime after the next election.

Labour's five-point plan for growth is too modest to work economically, nor will it capture the voters' imagination. A better argument would begin by pointing out that economic conditions, either domestically or internationally, are unlikely to pick up in the medium-term. Second, that borrowing rates for the government remain rock-bottom, which indicates the jitters over the UK's creditworthiness have been quelled. The markets are therefore willing to finance infrastructure development, and the government should borrow to create a recovery fund. Finally, Labour should take up the idea of David Blanchflower, the economist who sat on the Bank of England's monetary policy committee, to cut national insurance for employers who take on young workers. These policies might well win back some of the business support that slid away from the last Labour government. They would also make sense with many of the voters worrying about their own jobs. The coalition's economic argument has been shown to be wrong; it is time for a replacement.

• This article was amended on 17 November 2011 because the original described Matthew Oakeshott as the Lib Dem Treasury spokesman. Oakeshott resigned from this position earlier this year.