A senior Liberal Democrat has urged Chancellor George Osborne to use next month's Budget to cut personal taxes, saying it would make a "big difference" to the economy.

David Laws, the former chief secretary to the treasury, said Mr Osborne should start "ending austerity" for millions of households by moving towards the coalition's goal of raising the income tax threshold to £10,000.

His call came as Labour stepped up its demands for "significant" tax cuts in the Budget in order to revive the the flagging economy.

Mr Laws, who was forced to quit the Cabinet over irregularities in his MP's expenses, said that while austerity would have to continue in the public finances, Mr Osborne could start to ease the pressure on household budgets.

"That gives you the opportunity of ending austerity in household budgets and allowing the household budgets of most people to start expanding again from later on this year and into next," he told BBC2's Newsnight.

"That would make a big difference to the economy and obviously to millions of people who have been through one of the toughest periods in terms of household budgets in living memory."

Meanwhile shadow treasury chief secretary Rachel Reeves is warning that the Government will not succeed in tackling the deficit unless it can inject growth back into the economy.

After shadow chancellor Ed Balls called at the weekend for "significant" tax cuts in next month's Budget, she will argue that stimulating the economy is an essential component of a deficit reduction strategy.

In her first major policy speech on the economy, Ms Reeves, who is seen as a rising star of Labour's front bench team, will also launch an attack on Mr Osborne's tax and spending rules saying they do not guarantee "long-term sustainability".

Addressing the IPPR centre-left think tank, Ms Reeves will say that a temporary cut in VAT would be the "fairest and quickest option" for stimulating growth.

"This is a temporary and targeted stimulus to restore confidence, strengthen investment and raise employment," she will say, according to advance extracts of her speech.

"It is not an exception or postponement of our plan to reduce the deficit - it's an essential and integral part of it.

"The point is not just that you need jobs and growth as well as a credible deficit reduction plan. The point is that a plan to reduce the deficit without a strategy for jobs and growth is not a credible plan at all."

Ms Reeves will acknowledge the importance of establishing Labour's credibility on the economy if it is to stand a chance of regaining power at the next general election.

"If we don't get this right, it doesn't matter what we say about anything else. Because earning people's trust that we will be responsible custodians of public money is the precondition for gaining the right to be heard on any other issue," she will say.

She will dismiss Mr Osborne's fiscal rules, saying they had already allowed the Chancellor to push back his original target date for eliminating the structural deficit by two years.

"The first rule amounts to saying that the Government promises to promise to eliminate the structural deficit five years forward from any given point," she will say.

"But because that five year horizon moves forward with every year, the delivery on that promise can advance ever farther into the future.

"It is rather like someone promising to give up smoking in five years' time - a promise which can always be kept, without ever stopping smoking, because its fulfilment is always five years in the future."