George Osborne admitted today that Britain's economic recovery will be "choppy", but insisted there is light at the end of the tunnel.
The Chancellor said there are grounds for "cautious optimism" over the country's prospects, despite figures showing CPI inflation still above target at 3.1%.
But he also warned the situation could deteriorate quickly if the Government goes into "denial" over the scale of its deficit, and does not follow through on tough spending curbs.
Speaking at Bloomberg's London offices, Mr Osborne said: "Here in Britain we can start to be cautiously optimistic about the economic situation.
"GDP growth in the second quarter surpassed expectations at 1.1%, with all but 0.2% of that coming from the private sector.
"Employment is growing at the fastest pace for over a decade, confounding predictions that the economy cannot generate private sector jobs.
"Manufacturing is picking up and exports are recovering thanks to increasing global demand.
"As the Bank of England confirmed last week, this is consistent with the kind of gradual recovery forecast by the Office for Budget Responsibility at the time of the Budget.
"The much-needed rebalancing of our indebted economy - away from government and towards the private sector, away from consumption and towards business demand, away from imports and towards exports - is beginning.
"But of course, we must remain cautious. Inflation is proving more persistent than expected, as the Bank of England governor explained in his letter to me this morning."
He added: "So I agree with Mervyn King when he said last week that we are likely to face a choppy recovery.
"To expect a smoother ride after the biggest economic crisis of our lifetimes, and with the debt problems this Government has inherited, would be asking too much."
Mr Osborne said there were "early signs" that the Government's "determined approach" to tackle the deficit were working.
But he warned: "It would be fatal to become complacent or to think that the job is done."
He went on: "Just because government bailouts helped to calm the markets for now does not mean that the risks have gone away - they have simply been transferred from banks to governments.
"Economic stability now depends on a credible plan to restore the public finances to a sustainable path.
"To fail to do that would mean higher market interest rates and higher debt interest payments - hardly a foundation for growth."
The Chancellor also attacked Labour as he outlined two groups opposed to the Government's action.
Saying he was "optimistic" the country could be steered "to calmer waters" if plans to deal with debt and rebalance the economy were followed through, Mr Osborne said:
"The alternative - to change course, put off dealing with our problems, be in denial about the scale of the deficit - is the surest way to disaster. It would wreck the British economy...
"There are some political opponents who claim that in setting out our decisive plans to deal with the deficit we have a taken a gamble with Britain's economy.
"In fact the reverse is true."
While some opponents denied any action was necessary - putting them "at odds with an international consensus which understands that the sovereign debt crisis is every bit as dangerous as the financial crisis of 2008, if not more so" - Labour was in a second group which accepted action needed to be taken but opposed the necessary measures.
"The Opposition has been voting in Parliament against some of the very tax measures which we now know its shadow chancellor was seeking to introduce when in office," Mr Osborne said.
"It is not a credible position for a political party to hold."
The comments come as shadow chancellor Alistair Darling is preparing to deliver a speech which is expected to warn that while Labour should criticise how the coalition is curbing spending, it must "accept the need to cut the deficit".
Mr Darling, who was overruled on plans to increase VAT, will say his colleagues failed to recognise public concern over spiralling government debt, instead getting "sidetracked" into an argument for "investment over cuts".
Mr Osborne said: "To say we must deal with the deficit, but refuse to say how, is simply taking the British people for fools.
"People are debating these issues up and down the country.
"Anyone who is serious about tackling the nation's debts needs to come forward with an alternative plan.
"Both those who deny the need to cut the deficit and those who refuse to say how to do it are placing themselves outside of the domestic and international debate.
"And in becoming deficit deniers they are saying that they would set the country on a road to economic ruin.
"We won't do that."
Turning to the forthcoming comprehensive spending review, the Chancellor said it would be guided by the two principles of growth and fairness.
Public spending would be refocused on areas that promoted growth, Mr Osborne said, adding: "It is not about how much the Government spends but about what the Government actually does with the money.
"We want to be laying the future foundations for economic growth and for a fairer society."
Citing Bill Clinton's New Democrats, and Labour figures James Callaghan, Roy Jenkins and Lord Myners in support of budgetary constraint, Mr Osborne said: "I repeat these observations because I reject entirely the false choice that some in the present political debate seek to establish between being responsible, and being progressive or fair.
"Successful centre-right and centre-left parties root themselves in a progressive belief that governments must live within their means, or the poorest suffer.
"Those that do not - and find themselves arguing for investment over cuts - lose their way."
And describing the spending review as a "collective effort", he added: "We are all in this together.
"And the spending review we will produce in two months time will show that."Reuse content