Rachel Reeves will draw the economic battle lines for the next general election on Tuesday, challenging the government’s claims that the economy is turning a corner when millions are still struggling with the cost of living.

The shadow chancellor will accuse Rishi Sunak and Jeremy Hunt of “gaslighting” the public with over-optimistic statements about the UK economy that are “out of touch” with most people’s lives.

Labour will draw on “new economic thinking” from leaders in Europe and America, Reeves will say, and she will claim that when it comes to Britain’s finances the government has “crashed the car and left it by the side of the road”.

Sunak will this week attempt yet another reset of his government after a disastrous set of local elections for the Conservatives in which their vote collapsed in councils across the country and they lost the flagship West Midlands mayoralty.

Sunak argued on Monday that the general election result was not a “foregone conclusion” despite the results, the Tories struggling to close the gap with Labour in the polls and many of his MPs privately conceding defeat was likely.

Tory plotters had warned that a poor set of results could be a moment of high peril for Sunak, yet rebels laid down arms after admitting they had not persuaded enough MPs to join them to force a vote of no confidence in his leadership.

The prime minister said he was “absolutely determined” to fight on in the run-up to polling day, expected this autumn, to show that the government was making a difference on issues including the economy, citing tax cuts and falling inflation.

In a speech in the City of London, Reeves will argue that Sunak’s message to voters that the economy is improving is “deluded”, ahead of the release of a raft of economic data that the government hopes will help reverse its fortunes.

The Bank of England’s latest decision on interest rates comes on Thursday, with economists expecting the base rate to remain at 5.25% despite pressure from the government for rates to start falling before the election.

Ministers may be more cheered by quarterly GDP data on Friday that is expected to show the UK has emerged from recession, while inflation figures later this month are expected to show the Bank hitting its 2% target.

Reeves will tell business leaders: “By the time of the next election, we can, and should, expect interest rates to be cut, Britain to be out of recession and inflation to have returned to the Bank of England’s target. Indeed, these things could happen this month.

“I already know what the chancellor will say in response to one or all these events happening. He has been saying it for months now: ‘The economy is turning a corner,’ ‘our plan is working’, ‘stick with us’. I want to take those arguments head on because they do not speak to the economic reality.”

Labour’s internal research shows that Tory claims around the economy improving go down badly with the voters they need to win back at the next election, with people still feeling the pain of high inflation and mortgage rates.

Focus group respondents described the economy as “damaged”, “fragile” and “unbalanced”, and party strategists believe that even if people start to feel less worse off by the election, the government will not get the credit.

“During the local elections I travelled across the country. I spoke to hundreds of people. I listened to their stories,” Reeves will say. “And when they hear government ministers telling them that they have never had it so good, that they should look out for the ‘feelgood factor’, all they hear is a government that is deluded and completely out of touch with the realities on the ground. The Conservatives are gaslighting the British public.”

Labour plans to fight the election on the economy, believing that the government’s response to global pressures and Liz Truss’s disastrous mini-budget have destroyed the Tories’ reputation for economic competence, while Keir Starmer’s party now offers a more stable alternative.

Reeves will highlight Labour’s plans to boost the economy, including a national wealth fund to deliver private and public investment, changes to planning laws to build 1.5m homes, and creating 650,000 jobs in the UK’s industrial heartlands.

Yet the shadow chancellor, whose ambitions for the economy have tended to be laced with caution, will add: “I know warm words are not enough. I do not underestimate the challenges we face.”

Economists have said that whoever wins the general election will face some very tough choices on tax and spending if they want to make sure the public finances do not deteriorate further.

The Institute for Fiscal Studies and the Resolution Foundation have said the economic inheritance facing the next government will arguably be one of the bleakest any has faced since the second world war.

But Reeves will insist the constraints holding back Britain’s potential “are not immutable forces” and can be overcome with “vision, courage and responsible government”, pointing to the more active approaches of other countries.

“Vision – to pursue a different approach, drawing on new economic thinking shaping governments in Europe, America and around the world – but which this Conservative government resists,” she will add.

Labour has sought inspiration from Joe Biden’s plan to tackle inflation and create jobs in the US, as well as a bigger role for government in running the free-market economy, with a focus on supply-side reforms and green industrial strategy.

The Liberal Democrat leader, Ed Davey, will seek to put pressure on Sunak to call a June general election by tabling a motion of no confidence in the government when parliament returns on Tuesday, although this has no chance of passing.