The limit of the government's Help to Buy scheme needs to be cut dramatically from its current maximum of £600,000 to under £400,000, the shadow chancellor has said in an interview.

Ed Balls told the Guardian that the unbalanced nature of the housing market meant there was a risk of choking off the economic recovery.

He said there was a real danger that if George Osborne did not "do his bit" in supporting the housing market and a wider recovery, mortgage rates might start going up "earlier than they should".

Balls called on the chancellor to consider restricting the government's Help to Buy scheme to first-time buyers and cut the maximum size of a mortgage that qualifies for taxpayer-funded support from £600,000 to well below £400,000. Regional caps should be introduced to reflect the vastly higher prices in London and the south-east, he added.

The shadow chancellor also proposed an emergency "help to build" scheme, underpinned by new government guarantees, to support the building of a further 10,000 houses this year.

The "straitjacket of Osborne's fiscal strategy" had made it impossible for the government to create a more balanced recovery by building more homes, Balls said.

And he warned: "The lack of funding for affordable housing, alongside a housing market that has been very slow to respond to rising demand, means there is a real risk for our economy."

Wednesday's budget is the penultimate before next year's general election, and Balls is now focusing on the sustainability of the recovery, describing it as the weakest for 100 years.

Suggesting that the governor of the Bank of England, Mark Carney, faces difficult decisions, Balls said: "The low interest rates we need to strengthen growth and business investment are under threat if we do not have a balanced housing market recovery."

The "help to build" idea relies on the provision of guarantees that help small and medium-sized builders to access finance – through the banks – to get them building. Current guarantee schemes only support big infrastructure projects that help some of the bigger housebuilders.

Balls said his plan would lead to an extra 10,000 homes a year being built and help combat increasing concentration in the housebuilding market. "If you look at the big housebuilding programmes of the 50s and 60s there was a much larger place for medium and small housing developers."

In a wide-ranging interview, Balls also said the £50bn cost of building HS2, Britain's first high-speed rail line north of London, must be markedly reduced, calling for a major rethink of the second phase of the line to Manchester and Leeds.

His intervention comes before Monday's report by the new HS2 chairman, Sir David Higgins, which will show costs can be cut, but possibly not by as much as Balls seeks. But after 2015 Balls may be in a position to reshape HS2 radically. The government has admitted HS2 legislation will not get through parliament before the election, opening the possibility that the final go-ahead for the scheme will rest with a highly sceptical Balls. He warned that Labour would not write any blank cheques and would monitor the costs of the project "at every stage" in government.

Balls, who appeared to question the future of the line from London to Birmingham and beyond when he told the Labour conference last year that he would not follow the government's "irresponsible" approach, said he hoped Higgins would "give some reassurance and restore some credibility to the management of the project". Higgins is expected to announce savings of at least £1.5bn in London alone, according to the Financial Times.

The shadow chancellor said: "Certainly on the first phase of the project – the one where the legislation applies – he has got to show there, and more widely, he has got a proper grip on management and cost, that the costs have come down markedly."

Balls said Labour would continue to ask searching questions when the hybrid bill – to authorise the first stage of the line from London to Birmingham – is presented to parliament next month.

"The final decisions at royal assent will be for the next Labour government on the basis that we are elected. But it is my job to make sure, at every stage through the passage of the bill, that costs are being controlled, they are coming down, not up, the assumptions about passenger numbers continue to be robust and borne out by the latest evidence."

Balls made clear that he would press for a revision of the second phase – connections from Birmingham north to Manchester and Leeds – to put more emphasis on connections across the north-west and north-east.

"I do think there are some big questions about whether or not what is currently proposed in phase two properly links into the wider transport and economic networks. I was a member of the Northern Way taskforce for a number of years in the last decade. There was a big focus there on east-west links – Newcastle, Hull and Liverpool all being connected into the Leeds/Manchester big conurbation. Clearly links to London is an important factor. But it is not the only important factor in investment and job creation for the north of England.

"I think we should not only be looking at the detail of the routes – we should be asking the bigger questions. I am not sure they have been asked clearly enough yet."

Balls has been under attack this week for loading too much pain on the shoulders of the rich, with claims that Labour is once again likely to be seen as the anti-business party at the election.

He rebutted that argument by pointing to the party's support for Europe, saying: "At a time when living standards are falling for people, at a time when you have – from Ukip, for example – a political populism which is anti-European, anti-trade, I think it is important that we speak up for open markets.

"I want Labour to be the pro-business party at the next election, but I don't think you can ignore those pressures on the cost of living."

The shadow chancellor said Osborne's decision to cut the top rate of income tax from 50p on incomes over £150,000 would come to be seen as the single biggest mistake of his "omnishambles" budget of 2012, and yet it was the only decision on which he had not made a U-turn.

"It is very, very hard for David Cameron and Osborne to do anything now that gives them any credibility as being on the side of working people on low and middle incomes. I just think that is lost to them."

Balls said the "hubris and arrogance" of Osborne had alienated the public after the chancellor asserted that the return of economic growth proved he had won the intellectual argument with Labour.

What Balls said



On housing

"The low interest rates we need to strengthen growth and business investment are under threat if we do not have a balanced housing market recovery."

On HS2

"I do think there are some big questions about whether or not what is currently proposed in phase two [Birmingham to Leeds and Manchester] properly links into the wider transport and economic networks. Linking to London is an important factor. But it is not the only important factor in investment and job creation for the north of England."

On an in/out European referendum

Warns that a revision of the Lisbon treaty to underpin new eurozone governance arrangements could eventually trigger an in/out referendum under a Labour government on the grounds that UK sovereignty could be passed to the EU. Asked whether such a treaty revision could lead to a ceding of UK sovereignty to Brussels – the trigger for Labour's in/out referendum – Balls said: "It is very uncertain. We have got to keep a close eye on that. That is a concern, something which both George Osborne and I would say is something which we think about hard. I don't think it is likely in the next parliament."

On Cameron and Osborne

"Their whole rhetoric on growth and deficit just jars. They just have not delivered. It is just at odds with people's lived experience." With Cameron and Osborne having failed to reverse their decision to scrap the 50p higher tax rate, "it is very, very hard now for [them] to do anything that gives them any credibility as being on the side of working people on low and middle incomes."