Chancellor will try to debunk claims that a further five years of austerity will restrict growth and hurt living standards

George Osborne is to tell an audience of free-market campaigners in Washington that the UK's economic turnaround will defy those who say austerity and low wage growth will lead to long-term stagnation. In his first major speech in the US, the chancellor will attempt to demolish claims that a further five years of austerity will restrict growth and hurt workers' living standards.

Osborne will argue at the American Enterprise Institute that low interest rates, the Bank of England's creation of new money through massive bond purchases under its quantitative easing programme and a strengthened banking sector can secure a bright future for the UK.

The speech is an attempt to head off concerns that Britain's recovery is built on an unsustainable housing boom.

Osborne will also address the wider debate with Keynesian economists concerned that workers face years of low wages and insecure jobs. He will call critics "pessimists" who have been proved wrong when they claimed that austerity would trigger a second recession.

He will say: "The pessimists are on the march again with their predictions of stagnation. We, the optimists, can prove them wrong again. Our nations' best days lie ahead."

Osborne's speech comes after head of the International Monetary Fund, Christine Lagarde, issued a warning to world leaders that they need to do more to deal with huge government and bank debts that she said continue to drag down growth and undermine the stability of the financial system. Speaking at the IMF's spring conference, Lagarde said leaders needed to co-operate in their efforts to repair public sector and bank finances to protect against a repeat of the 2008 crash.

Osborne is due to meet finance ministers and central bankers at the IMF spring conference after a whistlestop tour of Brazil to promote British business interests. Before his arrival in the US capital he was praised, along with David Cameron, by Jim Yong Kim, the head of the World Bank, for maintaining aid spending during a time of difficult budget cuts.

Kim said the prime minister and chancellor were brave to spend 0.7% of GDP on aid, which he said made a huge difference to developing countries starved of private sector funds.

The chancellor is keen to go into the next election contrasting his more optimistic outlook with gloomy predictions from Labour that a race for growth will lead to another crash.

Larry Summers, the former economic adviser to Barack Obama, famously wrote last year that the west was about to enter a "secular stagnation" characterised by a lack of consumer demand that will restrict wages and business investment. He argued that governments need to intervene to educate workers and cope with ageing populations.

Osborne will say: "Proponents of 'secular stagnation' argue that over recent decades monetary policy has had to work harder and harder to sustain growth, and has now reached its limits. Demand can only be sustained with further fiscal stimulus and higher government debt.

"But developments make this argument increasingly difficult to sustain. The evidence increasingly shows that monetary policy, broadly defined and effectively deployed, can work, but with two caveats. Banks need to be well capitalised so that the monetary transmission system is working, and there needs to be credible fiscal policy."

Osborne will cite job creation in the UK, which has been "better than anyone expected: three times faster than any previous UK recovery, with more than four new jobs in the private sector for every job lost in the public sector". However, critics have pointed out that self-employment accounts for a majority of new private sector jobs, and that one of the fastest-growing areas is estate agency.

Lagarde's warnings against complacency echoed an IMF report earlier in the week that chastised Brussels for failing to put in place a financial lifeboat capable of rescuing more than a few small banks. The financial stability report also highlighted concerns at the rise of risky investments in the US and difficulties faced by emerging economies destabilised by huge outflows of funds. Low inflation in the eurozone was also a concern, especially as it could herald a downward spiral of low growth and declining real wages.

She said the European Central Bank (ECB) was close to boosting its monetary stimulus to supplement low interest rates. "They are envisaging any tools to respond to the situation, and I think it is going to be a question of timing now."

Co-operation was a central theme of her speech. She said global growth could be as much as two percentage points higher over the next five years if the G20 fulfil promises made in Sydney at the last leaders' summit.

Lagarde also vented her frustration at persistent delays to the IMF's own reform programme, which was agreed in 2010 to increase representation from developing nations but has yet to be implemented.

She described the delay as "utterly disappointing" and pledged to press ahead "to ensure the continued legitimacy, relevance, financial strength, and effectiveness of the Fund".

The IMF wants to encourage policymakers in Europe, the US and Japan to consider deeper reforms to their labour markets and regulations that restrict trade. The broadly free-market agenda is designed to open up markets, spur growth, which in tun will and generate jobs.

She said: "Creating a more dynamic, job-rich global economy remains our collective goal. For this, policymakers should manage the recovery more actively and reinforce their co-operation to minimise negative spillovers and promote financial stability."Overall, global growth is projected to improve further in 2014 and 2015, although remaining below past trends. The costs of continued sluggish growth are clear-- – there will only be modest income gains and gradual reductions in unemployment."

While the UK and the US have forced their banks to bolster bank balance sheets and put in place mechanisms to deal with institutions that fail, the eurozone is lagging.

She said: "In the euro area, a common fiscal backstop remains missing.

While several banks have improved their capital ratios, including through raising fresh equity, balance sheet repair remains incomplete and fragmentation persists."