Chancellor Alistair Darling will today set out his view of Britain's prospects for economic recovery as he delivers one of the most anxiously awaited Budgets of recent years.

With the economy mired in recession, Mr Darling has already indicated that he will sharply downgrade his forecasts for output - which are expected to confirm that the UK is in the most savage downturn since the Second World War.

At the same time, the worsening state of the public finances - with borrowing expected to hit £160 billion this year - has left him little scope for fresh action to revive the economy.

Bank of England Governor Mervyn King has already warned that the Government cannot afford a repeat of the £20 billion "stimulus" package announced by Mr Darling in the Pre-Budget Report (PBR) in November.

Instead, he looks set to be confined to a more modest set of measures - including some "targeted" action to help the unemployed as the dole queues continue to lengthen.

Mr Darling will also issue his own estimate of the cost of the bank bail-out - put at £60 billion according to reports - admitting for the first time that the Government may not recover the full costs.

Late last night the Treasury said that an even higher estimate of £200 billion by the International Monetary Fund (IMF) was issued in error and had been withdrawn.

There was no immediate explanation for the mistake - which is a potential embarrassment for the global financial watchdog - and no indication of what the correct figure should be.

Nevertheless, the grim state of the economy was underlined by official figures yesterday showing that it had entered a period of deflation - according to the retail price index (RPI) - with prices falling for the first time in almost half a century.

In its latest Global Financial Stability Report, the IMF said that governments like Britain's - which had borrowed to boost economic activity - now needed to take firm action to reassure the markets they would rebuild their finances.

Mr Darling will announce a further £10 billion-a-year in public sector efficiency savings - on top of the £5 billion announced in the PBR - as part of his effort to get the public finances back on track.

However the high-level panel which advises the Treasury on Whitehall efficiency warned yesterday that there were "few easy wins" left, and that it would be another four years before the full benefits of the programme fed through.

The Chancellor is expected to predict another two years of high borrowing levels - with reports that it could reach £160 billion this year with another £175 billion in 2010.

He will also acknowledge that his PBR forecast that the economy will shrink by between 0.75% and 1.25% was over-optimistic, with a revised estimate of a contraction of at least 3%.

He is however expected to predict that the economy will return to growth next year, with output increasing by around 1%.

Within the constraints he is facing, Mr Darling will take what action he can to inject some fresh confidence and boost activity.

It is reported that he will announce a £1 billion housing package, with money to fund the building of new council houses and to invest in building projects where work has stalled because of the lack of cash.

The stamp duty holiday on homes worth up to £175,000 is expected to be extended to the end of the year, while it is reported that the Treasury will underwrite mortgage-backed securities worth £50 billion in an attempt to encourage more lending to homebuyers.

Ministers have also been keen to portray it as a "green" budget with a reported £500 million to pay for home insulation and for investment in wind farms and other renewable technologies.

However environmentalists have been less impressed by plans to help the struggling car industry with a "scrappage" scheme offering motorists up to £2,000 if they trade in their old car for a more environmentally-friendly new one.

In other measures, Mr Darling is expected to announce plans to "name and shame" large-scale tax avoiders and incentives for oil companies to explore new fields in the North Sea.

Despite assurances from officials that the planned efficiency savings could be achieved through natural wastage rather a fresh round of redundancies, there was anger last night among trade unions at the proposals.

PCS general secretary Mark Serwotka said that the Government should be targeting big corporations and the wealthy rather than ordinary civil servants.

"The Government calls these cuts 'efficiency savings', but let's be clear they are real cuts that will affect public services, people's jobs, livelihoods, and pensions," he said.

"Instead of cutting more of my members' jobs, the Government should remember that just one HM Revenue and Customs employee brings in over £600,000 in revenue each year.

"If the Government funded more staff they could collect the tax owed by big corporations and the super-rich, and maintain or even improve public spending."

Shadow Work and Pensions Secretary Theresa May said today's Budget would be "a day of reckoning" for the Government.

Speaking on GMTV, she said: "We are now facing the longest recession since the Second World War, we have the worst public finances of all the countries in the G20, government borrowing is set to reach record levels today and, of course, unemployment may now rise above the level which the Government inherited."

Asked what she would like to see in the Budget, Ms May said: "There are certainly some things I want to see the Government doing for people who are unemployed, I'd like to see them putting some money into Masters degrees for scientists, I want to see them putting some money into apprenticeships to make sure that when businesses go down people who are doing apprenticeships with those businesses don't lose their opportunity for that training."

Liberal Democrat treasury spokesman Vince Cable said: "The Government is faced with a very deep recession, probably the worst we've had since the Second World War.

He told GMTV: "With rising unemployment we are now getting this thing called deflation - falling prices, falling wages - while at the same time the Government has an enormous deficit on the Budget, caused largely by the collapse of revenue from the City of London and that's a problem that is going to continue for some years to come and balancing those is extremely difficult."