Ed Balls has warned that an emergency multibillion-pound package to inject lending into the British economy still fails to address the lack of economic confidence and demand. The shadow chancellor said the Bank of England's thinking still seemed to be driven by Montagu Norman, the governor who led it through the depression of the 1930s.

He said the measures announced on Thursday night at the Mansion House in London by the chancellor, George Osborne, and the bank's governor, Mervyn King, should have been implemented two years ago and would not work if businesses were not investing.

Osborne warned that the "debt storm" on the continent had left the UK and the rest of Europe facing their most serious economic crisis outside wartime. In a joint proposal between the Bank of England and the Treasury, banks will receive cut-price funds, provided they pass on the benefits to their business customers.

This new "funding for lending" scheme could provide an £80bn boost to loans to the private sector within weeks and alleviate growing fears of a second slump since the start of the financial crisis in 2007.

In a second scheme, within the next few days the bank will begin pumping a minimum of £5bn a month into City institutions to improve their liquidity.

Balls told Sky News: "Simply giving the banks billions of pounds doesn't translate into loans to business. If business is not investing and creating jobs and if our economy is not growing, that's the fundamental problem, and I've said consistently for two years that you can't do this simply by throwing money at the banks.

"You've got to accept that the fiscal plans of the chancellor haven't worked, they've backfired, they've taken us back into recession."

Speaking on BBC Radio 4's Today programme, Balls compared the government's fiscal policy to the 1930s depression era: "It failed then and it's failing now".

He said the announcements were a clear sign that the bank was worried. He did not dismiss the injection of cash for lending in principle, but argued that fiscal, as opposed to monetary policy was critical to recovery, pointing out that, apart from Italy, the UK was the only country in the G20 in recession.

The government has described the plans as an attempt to stretch its "plan A" to the limit. There has been concern from some banks that the plan does not change the dynamic as they will be expected to take the risk on the loans.

The treasury minister Mark Hoban told Today that the government's fiscal tightening had had no impact on growth. He said taxpayers' money would not be at risk as a result of the £80bn bank credit scheme.

Conservative MP Andrew Tyrie, chairman of the Commons treasury select committee, welcomed the plans: "The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks."

Balls said: "The Bank of England's new funding for lending scheme is a significant admission that the government's existing policies have failed. Businesses will be desperately hoping it is more successful than George Osborne's Project Merlin and credit-easing schemes which have actually seen net lending to businesses fall."

He said Osborne's speech was dangerously complacent. "He is sticking with policies that have choked off the recovery, pushed up unemployment and are leading to £150bn of extra borrowing."

Balls also attacked Osborne over his remarks about a possible Greek exit from the eurozone.

"I was at the Mansion House last night and there was a frisson around the room when our chancellor started openly talking about whether Greece should leave the eurozone. I do not think that is a very wise or sensible thing to do," he told BBC Breakfast.

"I think Greece has got to sort out its issues – and that is a matter for Greece. What I am really worried about in the eurozone is that countries like Spain or Italy – which are huge, to which we as a country are very exposed – they have not sorted out their problems.

"Unless we get a global growth plan going, including in the eurozone, you can't turn this round. I am afraid that our government seems to be urging the wrong actions in Europe as it takes the wrong actions here in Britain too."

The shadow chancellor pointed out that Osborne had "snuck out another U-turn" in his speech, in particular to the objectives of the new financial policy committee at the bank.

"Labour and business organisations like the CBI have been calling for the new financial policy committee to have supporting economic growth as one of its key objectives. The chancellor voted against our amendment on this but in the face of an imminent defeat in the House of Lords he has now backed down."