The government says the VAT cut will help low-income families
The government's attempts to boost the economy by temporarily cutting VAT have been an "unbelievable and expensive failure", David Cameron has said.
The Tory leader pointed to figures suggesting shopper numbers were down in December, in a BBC interview.
Latest mortgage approval figures showed the stamp duty holiday for homes under £175,000 was not working, he added.
The government says it is offering help to families and accuses the Tories of being a "do nothing party".
Prime Minister Gordon Brown argues that while he has brought forward plans to recapitalise the banks, bring forward public spending, cut VAT and increase child tax credit and payments to pensioners, the Conservatives would "do nothing and let the recession take its course".
I think this will go down in history as one of the most appalling wastes of money in British political history
David Cameron Conservative leader
But Mr Cameron told Radio 2's Jeremy Vine programme that the government's plans to boost the housing market and encourage spending by a temporary 2.5% VAT reduction, which came into effect in December, had not worked.
"The VAT cut has been an unbelievable and expensive failure," he said.
"This government, that lectured us about prudence, has spent £12.5bn of our money... and wasted it."
Highlighting figures from the latest Retail Insight Report, suggesting retail footfall was down 3.1% in December from a year earlier, he said: "I think this will go down in history as one of the most appalling wastes of money in British political history."
He said Bank of England figures showing mortgage approvals fell to 27,000 in November - at least a nine-year low - also showed the stamp duty holiday was not boosting the housing market.
The government is completely paralysed at this crucial moment
Vince Cable Liberal Democrat Treasury spokesman
Mr Cameron said the recapitalisation plan had not helped small businesses which were still unable to get access to affordable credit.
He repeated calls for a £50bn government national loan guarantee scheme to help them, to stop the credit crunch "destroying tens of thousands of good small businesses".
Mr Cameron said his party would be arguing for a more "balanced" economy, encouraging saving "rather than just borrowing", more manufacturing and a greener economy which was less reliant on oil.
But he also said the market system needed to be reformed to make it more "ethical".
"Business is not just about making money. It is also about acting in an ethical way and I think we need to build a more ethical capitalism in Britain as we come out of this dreadful recession."
The Liberal Democrats said on Friday the mortgage approval figures suggested the "correction" in the housing market was "being exaggerated by the complete collapse of mortgage lending by the banks".
"The government is completely paralysed at this crucial moment," said Treasury spokesman Vince Cable.
"Ministers should consider promoting a simple, standardised mortgage with a market guarantee for the first few years of interest payments in order to help first-time buyers who can genuinely afford to take on home ownership."
The government says the Conservatives are isolated as other countries around the world have followed UK policies on cutting taxes and raising borrowing to support the economy.
They also argue the VAT cut is the fairest way to get money into the economy because low-income households spend a larger share of their income on VAT than richer households.
Last week Secretary to the Treasury Angela Eagle accused the Conservatives of "empty promises", adding: "It says something about their inability to move on from their 1980s ideology that they regard real help now - such as the £60 for pensioners, and the child benefit and child tax credit increases brought forward to 1 January - as state intervention to be opposed."
But there has been some criticism from two German politicians and the chief economist at the International Monetary Fund of the decision to cut VAT from 17.5% to 15% until the end of 2009.
The Liberal Democrats tried to get it overturned in a Commons debate in December. Mr Cable said it was "seriously defective" as a way of getting money into the economy.
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