by Steve Schifferes BBC News Online economics reporter

Chancellor Gordon Brown is expected to announce a substantial increase in borrowing on Wednesday, as he faces his biggest economic challenge yet.

Mr Brown told the Cabinet this morning that Britain was facing the sharpest slowdown in global activity for almost 30 years, with 20 of the world's leading economies in recession.

But he said that thanks to the tough decisions taken over the last 5 years the UK was better placed than most other countries in the rest of the world.

Nevertheless, the slowing economy threatens to derail Mr Brown's ambitious plans to reform the UK's public sector - and strike action among public servants is adding to the pressure on the government.

Pre-Budget report predictions

Growth: Down from 2.5% to 1.5% Borrowing: Up from �11bn to �20bn Taxes: National Insurance up 1% from April Higher landfill tax Family baby bonds Stamp duty increase

When the chancellor rises in the House of Commons at about 1530 to deliver his pre-Budget report, he will be forced to admit that his economic forecast has gone badly wrong.

Falling tax revenues mean that Mr Brown's renowned prudence will have to be ditched for a government borrowing spree this year that could reach �20bn.

Speaking on BBC Radio 4's Today Programme, Shadow Chancellor Michael Howard accused the government of "Enron-style" accounting.

He said there was a further �100bn of borrowing that does not appear on the government balance sheet - which would push Mr Brown close to his own debt limit of 40% of GDP.

Pay row

The growing budget deficit comes against a background of unrest over public sector pay, with the firefighters' strike the latest and most serious action to hit the government.

The worsening economic situation is one reason why Mr Brown will deliver a tough message about the need to stand firm in the fire dispute.

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The Treasury estimates that giving in to the firefighters' 40% pay demands could have a cascading effect throughout the public sector, adding at least �16bn more to the wage bill - and the deficit.

Mr Brown will lay blame for the growing budget deficit and the economic slowdown at the feet of the world economy, which he says is weaker than any time for a generation.

But the shadow chancellor disputed the claim, saying that the world economy had grown much slower in the early 1990s.

Mr Brown will have to address the issue of public sector pay.

The firefighters dispute is just one of a series of wage battles between the government and the public sector unions.

In the past, when the government got into trouble, for example over the fuel protests and the pensioners 75p increase, Mr Brown's coffers were full.

This time, the call for further belt-loosening by public sector workers may fall on deaf ears.

And, in the longer term, Mr Brown wants to be careful about how he handles his relations with the unions - who may be his main allies in any future battle to succeed to the leadership of the Labour Party.

Limited options

Mr Brown is prone to use his pre-Budget report to float many of his favourite schemes designed to catch the popular imagination.

This time there is likely to be more talk of giving extra help to poor people with savings, perhaps by providing matching grants or "baby bonds" - which were first proposed at the time of the last General Election.

Mr Brown will also be keen to highlight the extra help to parents through the new set of child tax credits that come into effect in April.

But businesses and households may face higher taxes on rubbish disposal.

But in truth, his options are limited.

Raising taxes further when the economy is slowing would produce howls of protest, and could risk jeopardising the recovery.

Even a modest proposal to raise the rate of stamp duty to cool the booming housing market might be seen as a step too far.

Cutting spending - when the centrepiece of the government's programme for its second term is the modernisation of the public services - would also be politically impossible.

So the chancellor will borrow the money instead, and hope that the economy will recover enough in the next two years to allow him to meet his fiscal rules.

If the borrowing is only for the short-term, his �50bn cushion of accumulated surpluses built up over the past five years would allow him to weather the storm.

If it does not, it could leave Mr Brown facing a general election with tax increases, not tax cuts, to offer the electorate.