George Osborne yesterday declared that "Britain's economic plan is working", as he announced the first upgrade in growth forecasts since the coalition came to power.

The independent Office for Budget Responsibility, which was set up by the chancellor to take the politics out of economic forecasting, now expects growth of 1.4% in 2013 and 2.4% in 2014, after three quarters of solid expansion so far this year.

Growth forecast

That remains below the long-term average growth rate of around 2.5%; but is far stronger than the 0.6% and 1.8% growth this year and next that the OBR projected when it last pronounced on the state of the economy in March.

From 2015, the OBR is actually expecting modestly weaker growth than it was nine months ago, however.

The chancellor repeatedly insisted in the House of Commons that the improvement in the economic climate since the start of the year resulted from his deficit-cutting strategy, and the "sacrifice and endeavour of the British people".

Unemployment

But the detail of the OBR's forecasts show that it has also resulted from an increasingly buoyant housing market, and an upturn in consumer spending.

The OBR has revised up the level of house prices by a total of 10% by 2018; it is now expecting prices to rise by at least 5% in 2014 and 7% in 2015.

The housing market has been boosted over the past 12 months by the government-backed funding for lending scheme, which helped to bring down the cost of mortgages; and the announcement of Help to Buy, Osborne's package of mortgage subsidies.

"Clearly the game changer has been the help to buy scheme. What could have been a very bad year for consumer spending growth has turned into a very respectable year for consumption," said Alan Clarke, UK economist at Scotiabank.

Household consumption growth has been revised up, to 1.9% next year, and 2.8% by 2017 – though in the short-term, the OBR believes most of it will result from shoppers dipping into their savings.

Public borrowing

Wages are finally expected to outpace inflation in 2014, bringing to an end the relentless decline in living standards that has characterised the post-recession period.

But the scale of the squeeze since the crisis means that the OBR now expects it to take until 2018 – a year later than it expected in March – for real wages to creep back to the level seen in 2008. "The much delayed recovery in earnings is being delayed still further," said Matthew Whittaker, senior economist at thinktank the Resolution Foundation.

Robert Chote, the OBR's director, said: "In the household sector, the pick-up in consumer spending this year appears to have been driven more by lower saving than by a pick-up in incomes. This isn't sustainable for ever and we expect consumer spending growth to slow next year until productivity growth revives and helps lift earnings."

Meanwhile, the long-awaited upturn in business investment, which the government had hoped would inaugurate a "march of the makers", is now scheduled to take place next year.

The OBR had expected business investment to jump by almost 2% in 2013. It is now projecting a decline of 5.5% – followed by a sharp turnaround to 5.1% growth in 2014, and a strong recovery thereafter, with investment growth hitting 8.9% by 2017.

Recent upbeat business surveys have suggested that firms may be preparing to increase capital spending; but Steve Radley, head of policy at manufacturers' group the EEF, expressed scepticism about whether even the new, less ambitious forecasts could be met. "I think we've been here before a couple of years ago, when investment intentions picked up and it still proved difficult to get over the line".

Duncan Weldon, senior economist at the TUC, pointed out that just 20% of economic growth over the next five years is now expected to come from business investment and net trade – down from half in the forecasts that accompanied Osborne's first budget.

"There's just a complete giving up on rebalancing: there wasn't even a mention of the word," he said. Britain's share of world export markets is expected to continue declining.

Trevor Greetham, asset allocation director at fund manager Fidelity, said this consumer-led recovery could prove vulnerable, if inflation rises more quickly than the OBR expects, and the Bank of England steps in with a rate rise.

"Ongoing government spending cuts mean the UK is experiencing an old-style housing-led recovery leaning heavily on loose monetary policy and tax-payer financed schemes to boost mortgage availability. There's the risk of a whipsaw in house prices and further financial stress when inflation pressures eventually force base rates higher."

The Bank's monetary policy committee has promised to leave interest rates on hold at their record low of 0.5% at least until the unemployment rate falls below 7%. On the latest forecasts, the OBR now expects that to happen in 2015, two years earlier than it previously thought.