The backdrop to the most eagerly anticipated Budget statement for a generation is the worst banking crisis since the First World War, and an economy in meltdown. So in the Pre-Budget Report on Monday, as the Chancellor outlines his plans to stop recession turning into depression, he will also have to lay bare how bad he expects the downturn to be and just what impact his spending spree will have on the public finances.

The Government insists higher borrowing, lower taxes and increased spending are vital to combat recession while the Conservatives accuse it of playing havoc with the public purse and storing up painful tax rises for the future to pay off debts.

There are also fears the pound will take a further hammering as the world gives its verdict on the sorry state of the public finances. Sterling has lost 25% of its value against the US dollar in just four months and a £1 euro no longer looks like fantasy.

Geoff Dicks at Royal Bank of Scotland, said: "While the Chancellor may be justified in responding to the downturn in the real economy with tax cuts and higher public spending, he should acknowledge that this exacerbates the deterioration in the public finances, and set out a credible policy for reducing the deficit over the medium term."

Gordon Brown has so far refused to admit in public that this means higher taxes, and the day of reckoning will be grim for whoever is in power, particularly as tax cuts outlined on Monday are likely to be aimed at the poorest. Darling faces another unenviable task in confirming what everyone except the Prime Minister already knows - boom and bust is back.

It all makes for a barnstorming session in the House of Commons:

GROWTH

The Chancellor will be forced to tear up forecasts for economic growth made in the March Budget - which even then looked wildly optimistic.

Despite warning at the time that Britain faces "the worst period of financial disruption for a generation", Darling pencilled in growth of 1.75% to 2.25% this year, 2.25% to 2.75% in 2009 and 2.5% to 3% in 2010.

The City didn't buy it, saying he would have to downgrade the forecasts come the PBR, and so he will, but by how far? With forecasters all over the world, from the Bank of England to the International Monetary Fund, predicting recession next year, the Chancellor has little choice but to do the same.

City economists are forecasting that the economy will shrink by somewhere around 1.5% in 2009 and again by a smaller amount in 2010, but Darling is unlikely to go that far - this is a political speech after all.

Nevertheless, as Deloitte economic adviser Roger Bootle says, he will have to "bite the bullet". A figure of between no growth and contraction of 0.5% for 2009 seems likely.

"The severe deterioration in the economy over the past few months means that the Chancellor will have no choice but to slash his economic forecasts, at least for this year and next. The blame, no doubt, will be put firmly at the door of global factors," says Bootle. "He will really have to bite the bullet when it comes to the forecast for next year. Even if forecasting an outright fall in GDP proves to be one step too far for the Chancellor, he will have to concede that the economy is at least unlikely to grow at all next year.

"And while he will presumably predict some recovery in 2010, his forecast is still likely to be weaker than that presented in the March Budget."

BORROWING

The dramatic deterioration in the outlook for the economy has blown the Chancellor's previous projections to pieces as tax receipts plummet, and Darling will announce hundreds of billions of pounds of extra borrowing on Monday.

Dismal figures yesterday - shrugged off by the Government as if they no longer matter - showed the public finances are already spiralling out of control, and the spending splurge hasn't even started yet.

Borrowing rocketed to £37 billion in the first seven months of the year - some £17 billion more than in the same period of 2007 and dangerously close to the £43 billion the Chancellor said he would borrow over 12 months.

Those borrowing forecasts will be torn to shreds on Monday.

While the Chancellor is likely to raise March's borrowing target of £163 billion over five years to more than £400 billion, trust of Government forecasts is so low some in the City reckon it could approach £600 billion. Indeed, in five years' time, Capital Economics forecasts borrowing to hit £160 billion in a single year, just £3 billion less than the Government planned over the full five years. That would represent almost 10% of GDP, worse than the recessions of the Seventies, Eighties and Nineties.

David Page of Investec said: "The public finances are appalling. Nevertheless, the palpable risk of some thing more pernicious than a recession, to our minds justifies fiscal stimulus. But the numbers involved are frightening. The deterioration in the public finances is a legacy that the UK will face for much of the next decade."

DEBT

Government debt is already a bone of contention, with Downing Street refusing to include the nationalisation of Northern Rock in its figures.

In March, it forecast debt to hover around 39% of GDP over the coming years having reduced it from nearly 45% when it came to power to under 30% early this decade.

However, figures from the Office for National Statistics yesterday showed debt including Northern Rock was now 42.9% of GDP and rising. While the Government is likely to admit debt will go above 40% of GDP, independent forecasters warn it could hit 50% or even 100%.

The new forecasts will drive a coach and horses through the fiscal rules that were once the bedrock of New Labour's economic policy, and ministers have already indicated a new set of rules will be established to bring the public finances back to a sustainable position over the medium term.

The old Golden Rule dictated that the Government would only borrow to invest and not to fund current spending while the Sustainable Investment Rule required debt to be kept at a "prudent" level, currently 40% of GDP.

But Prudence is dead, Keynes lives again, and the battle lines are drawn.