Chancellor George Osborne insisted that ditching his plan to restore the nation’s finances could leave the UK facing an economic disaster like Cyprus.
The bleak assessment came as Mr Osborne rejected calls for a change in approach ahead of Wednesday’s Budget, saying there was no “miracle cure” to the country’s troubles.
The Chancellor said the crisis in Cyprus was an example of “what happens if you don’t show the world you can pay your way”.
He told BBC1’s Andrew Marr Show: “That is why in Britain we have got to retain the confidence of world markets.”
The Cypriot parliament is set to consider a European Union and International Monetary Fund bailout, with the possibility of a levy on bank deposits of up to 10%.
Mr Osborne, who has promised to protect British military personnel and Government personnel from the levy, added: “Unless we in Britain front up to our own problems, the problems in our banking system, the problems that we are borrowing so much money, the problems that actually our businesses need more help to create jobs.
“If we don’t do those things then the difficult economic situation in Britain will get very much worse.”
The Chancellor acknowledged his austerity measures were “difficult” and the efforts to rebalance and repair the economy was “painstaking work”.
“There is no easy answer to Britain’s problems, there is no miracle cure because if there was a miracle cure it would have been deployed,” he said.
Lib Dem business secretary Vince Cable has suggested that borrowing more to fund capital spending could boost the economy.
Mr Osborne said: “I agree that we need to spend more on capital, which is why I had taken the decision in December to increase the spending on capital but paid for.
“You can’t get out of a debt crisis by borrowing more and more.”