Ever since his first Budget, the Chancellor has been able to argue, one way or another, that he is on the right side of the economic curve. Growth has generally come in marginally higher than forecast; unemployment marginally lower. Inflation might be soaring, but that is a matter for the Bank of England, and government borrowing has been kept within limits, to the point where George Osborne felt able to quip to the BBC earlier this week that "at least you are not interviewing a European finance minister who is currently terrified that he can't sell the country's debts". It now looks as though Mr Osborne's luck may have run out.

Figures we report today show that government borrowing for the current and next two financial years is set to exceed the amount that Alistair Darling's economic plan was projected to need. Forecasts by the independent Office for Budget Responsibility had estimated the borrowing requirements of Mr Osborne's programme well below those of a Labour government, committed to the gentler measures proposed by Mr Darling. New projections collated by the Treasury suggest the OBR's figures are out of date. Thus is the whole rationale for the Coalition's austerity plan called into question.

Until now, Mr Osborne has been able to claim that the long-term gain justifies the short-term pain, and that under Labour, longer pain would negate any gain. With the Autumn Statement less than two weeks away, some drastic rethinking is in order at Nos 10 and 11 Downing Street. In place of the virtuous circle Mr Osborne appeared to be relying on – higher growth generating more revenue, reducing unemployment, cutting the benefits bill, and so on – the country is embroiled in the same vicious circle as much of Continental Europe. Yesterday's unemployment figures offered further proof.

Growth estimates are being revised downwards; employment is contracting; tax revenue is static, and the benefits bill is rising. No wonder ministers want to review the inflation link for benefits. If the new projections are anything like correct, the fundamentals of the Chancellor's calculations have gone disastrously awry.

There will be time enough to ask whether this is because the original projections were unrealistic, or whether the crisis in the eurozone has derailed plans that might otherwise have been vindicated. Labour will doubtless maintain the former; Conservatives the latter. But the reality is that, without urgent action, the UK economy risks spiralling down into territory from which recovery will be even harder than it already is.

Jobs must be the key. Early on, Mr Osborne missed an opportunity to direct the extra billions released by the Bank of England's Quantitative Easing into ambitious infrastructure projects, and so to jobs. As is now clear, many of these pounds went not into spending to fuel the economy, but into paying down debt and – despite rock-bottom interest rates – saving.

Meanwhile, women faced with higher childcare costs and lower tax credits made the logical decision to stay at home – perhaps on benefits – rather than remain in paid work. And the consequence, at a time of employers' belt-tightening, has regrettably been not more jobs for young people, but no more jobs at all.

There are flaws in the UK jobs market. Competition at the low-skilled and entry level is high and pay is low. For all the Government's good intentions in this area, work does not always pay. There are more graduates now with expectations that cannot always be met, and school-leavers whose readiness for work leaves much to be desired. All this needs to be addressed. Without growth, however – whether natural, or, more likely in these conditions, generated by government – the economy will remain trapped in its vicious circle. Yesterday's unemployment figures tell Mr Osborne what he must do.