Labour say the government has conceded the extent of the UK's current economic problems after a minister spoke of a "national crisis" in growth and jobs.
Oliver Letwin told MPs that "an immediate national crisis in the form of less growth and jobs than we needed" had led to a review before the Budget.
The remark "let the cat out of the bag" about the impact of cuts, Labour said.
But government sources said Mr Letwin had referred to the legacy of debt and failing competitiveness left by Labour.
They said the Cabinet Office minister's comments to the Commons Environmental Audit Committee had been "taken out of context".
Officials insisted Mr Letwin was speaking about the serious economic situation the government inherited when it came to office in May 2010 and the growth review which ministers launched last November - not the period immediately proceeding the Budget.
Labour have accused ministers of endangering growth by cutting spending too far and too fast while business groups have also expressed concern about long-term strategy after the economy contracted by 0.5% in the final three months of the year - figures which at the time ministers described as "disappointing".
The government published its long-term plan to stimulate enterprise on the same day as last month's Budget, when Chancellor George Osborne promised a series of measures to put "fuel in the tank" of the economy.
Mr Letwin, a Cabinet Office minister who has a key role in co-ordinating policy across government, was asked by Labour MP Joan Walley how ministers took big economic decisions on issues which affected sustainability such as environmental standards for new homes.
"The way the decision has been made on that was that it was decided by the cabinet, as a whole, to have a growth review leading up to the recent Budget," he replied.
"Because we took the view, collectively in cabinet, that we faced an immediate national crisis in the form of less growth and jobs than we needed and we were determined collectively to try to increase that growth and those jobs."
Mr Letwin said Chancellor George Osborne and Business Secretary Vince Cable had subsequently chaired meetings to explore ideas that would "induce faster growth in the early years than we otherwise might have" while continuing to meet the government's longer-term goals.
The government announced the growth review in November and the subsequent meetings began in January, several months before the Budget.
'Carrying on regardless'
In response, Labour said ministers had recognised there was a "jobs and growth crisis in Britain" but had refused to change course on their central policy.
"It is a crisis of George Osborne's own making and the government still seems to be in denial," said shadow chief secretary to the Treasury Angela Eagle.
"By hiking up VAT and cutting too far and too fast we're now set for slower growth and higher unemployment in the years ahead.
"Recognising there's a problem is a good start. But there's no point having crisis talks if you then decide to carry on regardless with a reckless plan that is hurting but isn't working."
BBC political correspondent Carole Walker said Mr Letwin had "handed ammunition" to the opposition in the choice of language he had used.
However, she added that Cabinet Office sources insisted that the crisis he was referring to was the one left by Labour in terms of the recent recession and failing competitiveness.
The coalition has accused Labour of having no plan for dealing with the UK's record peacetime deficit while failing to make clear they would have implemented far-reaching cuts themselves.