When Gordon Brown's hopes of remaining in No 10 evaporated two years ago, his desperate advisers mocked up a poster of David Cameron as Gene Hunt from Life on Mars, perching smugly on a car next to the slogan "Don't let him take Britain back to the 1980s". In truth, he hasn't: the dire GDP figures mean we are in a far worse economic place than Thatcher's Britain.

It is worse than the last double-dip recession, in the mid-1970s, because the fall in growth since Lehman Brothers collapsed is much greater. It is worse than the 1930s, because the recovery to a pre-recession position will take much longer – output is not projected to return to 2008 levels until 2014. We are in the most protracted economic crisis since the Long Depression, which took place 140 years ago. "Don't let him take Britain back to the 1870s" would have been more accurate. I'll leave it to experts in mid-Victorian fiction to suggest which character Cameron should have been mocked up as.

With the economy now smaller than it was before George Osborne's Emergency Budget, there has never been a greater need for a coherent alternative. Britain faces "a death spiral of self-defeating austerity," argues the Nobel Prize-winning economist Paul Krugman. He echoes the language of that notorious hotbed of left-wing economics, Standard & Poor's credit agency. On downgrading the credit ratings of nine EU nations in January, it warned that austerity "risks becoming self-defeating" as demand fell, "eroding national tax revenues". Critics of austerity across Europe are utterly vindicated but the lunatics remain in charge of the asylum, and armed with scalpels.

And yet – despite this unfolding horror story – Ed Miliband has yet to offer a desperately needed alternative. Media pundits remain obsessed with personality: intriguingly, they largely ignored a recent Ipsos Mori poll suggesting that Miliband has overtaken Cameron on net favourability ratings: not a glowing endorsement, admittedly, when all three leaders are deeply unpopular. Ed Miliband will never be loved, but it really is policies, not personalities, that matter.

Miliband needs to do what Thatcher did in 1979: offer a coherent alternative. The opening for one has appeared. France's right-wing President Nicolas Sarkozy looks set to be defeated by Socialist candidate François Hollande, who at least talks about disrupting Europe's austerity consensus, arguing for growth and public spending, and hiking taxes on the rich. The pro-austerity Dutch government has just collapsed, and the left-wing Socialist Party is riding high in the polls. Europe's austerity winter may be drawing to a close.

Labour remains hobbled by Blairite ultras with no interest in a genuine alternative, even as Tory economics implode. In February, David Miliband assailed so-called "Reassurance Labour", who wanted the party to languish in a comfort zone. But the real problem is a "Surrender Tendency", who accept the underlying principles of what the Tories are doing: driving the private sector into public services like the NHS; breaking up comprehensive education; slashing welfare; and introducing savage cuts.

There is a different way. Take welfare spending: it is too high, but not because of scroungers lounging around watching Jeremy Kyle. Billions are wasted on housing benefit – which enriches wealthy landlords – that could go on building housing, stimulating the economy and creating jobs.

Introducing a living wage could help bring down the benefits bill – as well as reducing the money being spent on tax credits, a lifeline for millions, but effectively a subsidy for low pay. More money in the pockets of the poor would be a stimulus, too: unlike the rich, they spend rather than save. And there is a jobs crisis which has left more than six million people without full-time work. Tackling the triple crisis of housing, low pay and jobs will reduce our welfare bill without kicking the poorest. Then there are the banks: taxpayers have been forced to cough up billions to bail them out, but they have no meaningful control over them. But we could use them to boost parts of the economy we want to grow. Even Vince Cable has hinted at this, calling for RBS to be turned into a "business bank".

We should talk about tax justice, particularly in the aftermath of George Osborne's deeply unpopular scrapping of the 50p tax. Political and media establishment types regard anyone calling for higher tax as wild-eyed nutters, but they are in the minority. A ComRes poll at the end of 2010 found that 54 per cent supported raising the top rate of income tax to 60 per cent. Up to £25bn is lost through tax avoidance, compared with just £1.2 bn from benefit fraud: but which gets the most coverage?

Both the Tories and Labour's Surrender Tendency are discredited. But they will dominate the political stage until they are dislodged. Opponents of austerity need to develop a coherent alternative – and then force Miliband to accept it, kicking and screaming if needs be.

A revised edition of Owen Jones's 'Chavs: The Demonization of the Working Class' is published next week by Verso