The Group of 20 powerful nations existed before the credit crunch, but few outside the worlds of banking and finance had heard of it. The G20 only became the official steering committee for the global economy when, at the peak of financial turmoil, Gordon Brown used its Washington and London summits to galvanise world leaders into emergency action.

The G20 meeting in Toronto this weekend has sorely lacked such unity of purpose. It would flatter Mr Brown to suggest that his absence is the reason, although it is certainly a factor.

But in the past year, a lot more has happened in the world than a change of government in the UK. The most important development is a sharp shift in governments' feelings about their debts, prompted by investor panic over Greece and the wider eurozone.

In the first stages of the credit crunch, national governments spent public money to prevent a chain reaction of bankruptcies in the financial sector. The ensuing recession led, in many countries, to a collapse in tax revenues and soaring budget deficits. Anxiety switched from questions about the solvency of banks, newly flush with taxpayers' cash, to questions about the solvency of nations.

Governments cannot bail themselves out, they can only borrow to meet their spending needs. And if no one will lend, the only solution is savage budget cuts and higher taxes.

But if every country embraced austerity simultaneously, the fiscal stimulus that averted meltdown in the first place would be withdrawn. The world economy could slump.

So the G20 is divided between those who think it more important to retain a cushion of spending, to support growth, and those who think restoring market confidence through austerity is the key.

President Barack Obama is increasingly isolated as champion of the former camp. George Osborne's budget last week put the UK firmly in the latter one. The chancellor's plans envisage recouping a shortfall of around £86bn in four years, with the sharpest contraction of spending ever by a British government .

Mr Osborne insists he had no alternative. His coalition partners agree. That is a change in policy, driven, say top Lib Dems, by anxiety about debt after the euro crisis. The timing of their conversion also coincides neatly with their receipt of seats in cabinet.

It is true that Mr Osborne felt obliged to assault the deficit hard and fast, but the pressure was as much political as economic. He aims to get as much pain as possible out of the way in the early years of this parliament so he has some budget treats to give out on the eve of a 2015 election.

The government's assertion that its towering bonfire of services and benefits was "unavoidable" is false. Under Labour's pre-election plans, the deficit would have shrunk to 1.6% of GDP by 2015, well within the range that markets judge prudent.

The coalition tries to present the choice as binary – inaction or brutality – but there are middle paths available and good reasons to take a more gradual approach.

Government spending currently underpins demand, creating jobs and stimulating consumption, but the state can no longer afford to subsidise the economy at current levels. So the coalition rightly wants to effect a transition to a different kind of economy, less dependent on public money and debt. But to be confident of arriving at this destination, the government needs some sense of what will replace state investment as a spur to growth.

According to the budget, that function will be performed by a massive increase in private sector investment and exports. Mr Osborne reckons the proportion of growth coming from exports will increase from nought to around 30% within three years. He does not say who will finance this expansion, when banks are hoarding their cash. And he does not say what we will be exporting, nor to whom.

Britain is not the only country in the world that has a deficit and would like to buy less on credit, while selling more abroad. Meanwhile, countries that have surpluses, chiefly Germany and China, are not in a hurry to spend their cash building up UK manufacturing. Their own exporting industries are major employers and political pragmatism demands that if jobs are going to be funded anywhere it must be at home.

These are not just issues of abstract macroeconomics. Mr Osborne's austerity drive might put hundreds of thousands of public sector employees on the dole. At the same time, millions will have benefits cut, ostensibly as an "incentive to work". Where?

The chancellor's plan is that the promise of stable public finances combined with low corporate taxes will create the natural environment for entrepreneurialism to flourish. In that view, large parts of the public sector count as weeds to be uprooted, so that the new shoots of private growth can emerge.

Although the budget contained a few cash palliatives for low-income families, the overall thrust was Thatcherism of the most hawkish variety.

The last time that approach was brought to bear on the British economy, in the early 1980s, unemployment soared. The Tory calculation then was that job losses were the necessary cost of radical restructuring. But not enough was done to redeploy those whose livelihoods were lost. Many communities most affected by cuts and recession were excluded from the benefits of growth when it returned. Then, as now, the market was expected to drive the transition. But it failed to put capital in the gaps left by the state's withdrawal.

In opposition, the Tories made much of Labour's neglect of so-called Neets, young people not in education, employment or training. But in government, they have presented no strategy to include them in the labour market. Instead, the coalition's first budget risks creating a lost generation, like the one that missed its first vital step up the ladder of prosperity in the early Eighties.

A vital lesson from that period is that high unemployment carries a massive social and economic cost – in poorer health, higher crime, social breakdown – that does not immediately show up on a national balance sheet.

Either Mr Osborne has failed to factor that cost into his calculations or he thinks it is "unavoidable". Either way, he is wrong.