Ed Balls is in his office in the Norman Shaw South parliamentary building at the end of a long day. It is part of an unglamorous suite that he shares with the Labour leader, Ed Miliband; these are the same rooms occupied by David Cameron and George Osborne before the general election. The walls are lined with family photos, political cartoons, election posters and, intriguingly, a picture of the shadow chancellor with Dolly Parton.

Balls is in shirtsleeves, his tie loosened, having just returned from a public meeting in Cambridge, but he is energetic and, in the words of another shadow minister, "He looks like the cat who got the cream." More than a week on from the Budget and two months on from assuming the role of shadow chancellor, how successful has he been in trying to restore Labour's economic credibility?

“I set myself one task, which was to get Labour on to the front foot, back in the game, making the weather on the economy, and that's going to take me a year," he says. "But the fact that for the past week we've had people saying 'Well, what's the alternative?' is a vindication because it shows we're in the game. A few months ago, people were saying that there was no alternative. The phrase 'too deep, too fast' has a resonance with the public."

He leans back on the green sofa, legs crossed, arm stretched out. It would be a mistake, however, to confuse his confidence for complacency. "I don't believe the opinion polls on Labour's lead and we have work to do, in particular, on the economy."

Defined by Brown

With his reputation for confrontation and his leading role in the Blair-Brown wars, Balls has many detractors both inside and outside the party. So what does he think his biggest weakness is? There is a long pause. "I think three or four years ago, people would have said my biggest weakness was that sometimes I was awkward on television, with my stammer, but I think they'd say that much less now." I try again. What would he say his biggest weakness is now? Another long pause. "I'm a very loyal person and I allowed myself to be defined as somebody who was doing Gordon's bidding. I should have fought back harder to define myself at an earlier stage."

What about Ed Miliband? What is the party leader's biggest weakness? Balls is at his diplomatic best. "Ed's biggest weakness is that he is leader of the opposition and not prime minister. That's a frustration to all of us."

Labour's prospects at the next election depend on how well the "two Eds" can work together in opposing the coalition and rebuilding Labour as a serious force. Allies of the Labour leader are concerned that the shadow chancellor cannot be trusted. "Somebody asked me whether I amreconciled [to serving under Miliband]," Balls says. "To which the answer is: I was reconciled before I began."

Didn't he think he had a chance of winning the leadership last autumn? "No." So why run? "I wanted to be part of the future of shaping the Labour Party and making the arguments that matter to me." Balls says he is proud that his leadership campaign helped overturn the "false stereotypes" about him. Nonetheless, when the shadow cabinet jobs were doled out in October, he was passed over for the role he had long coveted and Miliband appointed Alan Johnson as shadow chancellor instead. Did the rejection upset him? "Yes. I didn't agree with it. I wasn't annoyed or disappointed, but I thought it was a mistake. And I said that to Ed."

Balls is quick to add that there were no "tough words"; moreover, he is keen to praise his predecessor. Johnson was criticised for his lack of economic expertise but Balls points out: "That line, 'too deep, too fast', was a line Alan was using. You shouldn't underestimate the work he had done."

As a Harvard-trained economist and former Financial Times leader writer, nicknamed the "deputy chancellor" during his seven years as a special adviser to Gordon Brown at the Treasury, he now holds the position for which he believes he is best suited. "I know what the words fiscal multiplier mean, and I know that the coalition is ignoring all the international and historical evidence on fiscal multipliers," he says - but he concedes that most members of the public aren't familiar with the phrase and "don't use it down the pub". He then adds, with a grin: "I'm increasingly of the view that George Osborne has no idea what the phrase 'fiscal multiplier' means, either, which is part of the problem."

Mervyn was right

Balls, who likes drawing up "dividing lines", eagerly distinguishes between his own background in economics and the Chancellor's political positioning. "The thing about Osborne is that he is a very political chancellor who has a political strategy, which is both about the electoral cycle and possibly about his own ambitions. He believes in the flat tax and the small state and wants his pain early."

But doesn't Osborne have the support of the world's leading financial institutions, including the Organisation for Economic Co-operation and Development and the International Monetary Fund? Balls is unimpressed and he has a ready-made answer: "In 1925, when Britain went back to the gold standard, that was supported by the Conservative Party, the Labour Party, the Bank of England, the civil service, the CBI, the TUC, the Times, the Economist; that consensus was very strong." Britain left the gold standard six years later, after it realised how this had prolonged its economic slump.

His criticism of the Prime Minister and the Chancellor is scathing, as you would expect. "What we're increasingly seeing is that Mervyn King was probably right," he says, alluding to a private conversation between the Bank of England governor and Louis B Susman, the present US ambassador to London, exposed by Wiki­Leaks last November. "These were a group of young politicians who didn't actually know much about the economy."

He is equally sceptical about the Conservatives' skill in handling labour relations, and attended the TUC's March for the Alternative on 26 March. Yet he is also critical of those in the trade union movement who have advocated a position of "no cuts". "There are some people who think we can have no cuts at all, who think we can do it all through tax avoidance. I think that's an impossible position and not a mainstream Labour position."

Quizzed about what economies he would make, Balls says: "We would have cut police spending by 12 per cent. We would have cut non-front-line school spending. We would have tightened up the DLA [Disability Living Allowance] Gateway . . ."

But didn't he denounce the Home Secretary, Theresa May, for making cuts to the policing budget when he was shadowing her position? "The difference was 12 per cent versus [the coalition's] 20 per cent; over four years versus the first two years." He persists: "There is a massive difference between halving the deficit in four years and eliminating it entirely over the same period." But, I point out, he used a high-profile speech at Bloomberg in the City of London in August last year to criticise Alistair Darling's plan for Labour to halve the deficit over four years. How does he justify the U-turn?

He hesitates. "Read me out the exact quote." I read it to him: "I told Gordon Brown and Alistair Darling in 2009 that . . . even trying to halve the deficit in four years was a mistake. The pace was too severe . . . " He doesn't wait for me to finish. "That's what I said in 2009. I was worried in 2009 about the pace of the cuts. What I'm happy to say now is that, compared to what I feared in 2009, unemployment came in better than we'd expected."

He argues that the so-called Darling plan did not involve "preordained" spending cuts in the coming financial year. "He had a deficit reduction plan; he didn't have an ideological, size-of-the-state plan, or a spending-cuts plan." He believes the best way to reduce the deficit is through growth and jobs, not cuts. Politicians have misunderstood the nature of financial markets and market credibility, he argues, and he quotes the old joke about the Latin American finance minister who tells colleagues: "We have come to the edge of the abyss and now it is time for a bold step forward." As Balls says, "There is a political view that the tougher you are, the more credible you are. Markets can sometimes be febrile and irrational but they also know that politicians who talk tough are normally the politicians who are on a losing wicket."

He cites the example of another tough-talking Tory chancellor, Norman Lamont, who vociferously defended British membership of the European Exchange Rate Mechanism in 1992, just weeks before Britain crashed out of it.

Few would doubt that Balls is master of his Treasury brief, but there has been the odd misstep. In a television interview on 30 January, he denied that under Labour there had been a structural deficit - the part of the deficit that would remain even after the economy had recovered to normal levels of output - in the years preceding the 2008 crash. "Was there a structural deficit? I don't think so," he told the BBC. I point out that, according to the Institute for Fiscal Studies, the UK had the second-highest structural budget deficit of all the G7 economies in 2007. Isn't he walking into the Tories' "deficit denial" trap by making such statements?

Balls chooses his words carefully. "We had a deficit every year under the Labour government because our policy was to balance the current budget but to borrow to invest - up to 3 per cent of GDP." He makes a small concession: "In retrospect, three years on, it was clear once the financial crisis had hit that people reappraised what their view of trend growth was and, in retrospect, of course there was a structural deficit. But there wasn't a structural deficit as judged by policymakers at the time. George Osborne was saying he was going to match Labour spending plans."

It is said that spending got "out of control" under Labour before the crash. Balls is defiant. "Were we acting in an irresponsible way in 2006 and 2007 on public spending? No, we were not. That is my absolute contention. I'm not going to say something that is untrue simply because the Tories want me to say it."

Chit-chat over breakfast

During his leadership campaign last summer, Balls had a dig at the Miliband brothers, saying it would have been "weird" if he and his wife, Yvette Cooper, had run against each other. But isn't it already "weird" to be in the shadow cabinet with his wife? Balls and Cooper, the shadow home secretary, were the first husband and wife to serve in the same British cabinet.

“It makes it harder for us, but also easier because we understand each other," he says. "If I say that I have to do something on a Saturday morning, she will instantly know that it's important; we understand the pressures on each other and know if each other is bullshitting or not." But, he adds: "There are also pressures on our family. Our kids have travelled more miles in their lives than any child probably should."

Does politics dominate the conversation at the breakfast table? "If I'm honest with you, I can't think of any time when I've sat around the breakfast table and had a conversation with Yvette about politics." So you don't discuss the deficit? "No." He says that most of their friends come from outside the world of politics. "For us, relaxing is not having a conversation about the welfare state."

I find this hard to believe. Balls looks most relaxed when discussing fiscal multipliers and quarterly growth figures. So he must be enjoying the job? "No," he says, "I hate it, because I'd much rather be in government."