Brown £20bn in red

Gordon Brown today delivered a dose of Budget bad news - coupled with a stark warning to the unions that the lid must be held down on pay.

And in a dramatic herald of combat against Saddam Hussein, he set aside a £1billion war chest to pay for military action against Iraq.

In a bleak pre-Budget report, the Chancellor sharply downgraded his forecast of the rate at which Britain's economy will grow this year and next.

The improvement this year will be only 1.6 per cent - compared with a confident 2.5 per cent Mr Brown predicted in the Budget only eight months ago. And next year the forecast is down from 3.5 per cent to three per cent at best.

The Chancellor almost doubled the rate of Government borrowing this year from £11 billion to a whopping £20 billion to close the hole in his accounts caused, he said, by a worldwide economic slowdown. Over five years borrowing would total £102 billion - towards the top end of City forecasts.

He had paved the way with a warning: "With 20 of the world's biggest economies in or just out of recession, we are seeing the strongest slowdown in global economic activity for almost 30 years." While Britain was better placed than most to weather the storm, "no country can insulate itself from the ups and downs of the world economy".

His gloomy message was unveiled to the Cabinet this morning. But the blame he levelled was strongly disputed by the Tories and some in the City who said the Chancellor's own over-optimistic forecasts and lavish spending plans must carry part of the blame.

Mr Brown, as widely predicted, raised borrowing from the £ 11billion originally planned for this year, with an even larger increase planned for next year.

The Chancellor's central message to business, the unions and to the Government's own MPs was the critical need to keep "a steady grip" on the economy.

The consolation for many was that he was set to steer clear of hefty new tax rises for now. The restraint was spurred by Treasury fears that big increases now could damage consumer spending.

The most severe tax moves are likely to be focused on "green" environmental targets.

Today's report includes proposals to spur business and encourage training for jobs, as well as a new clampdown on tax fraud.

The Chancellor concedes that his April forecast of up to 2.5 per cent growth this year and as much as 3.5 per cent next year is wrong. He won a mild boost when figures revealed growth had risen more than expected in the third quarter.

His Tory shadow, Michael Howard, said: "Gordon Brown made forecasts which he knew were optimistic and now he is having to pay the price, as we all are."

Mr Brown said: "Last year, of the major economies, the British economy was the fastest growing. This year, amid the worst global slowdown for almost 30 years the British and North American economies will grow faster than all the other major economies.

"Next year, Britain and North America are now forecast, even in an uncertain and unstable world, to continue to be the fastest growing of all the major economies."

He said Britain's monetary and fiscal framework was meeting the challenges of current times and warned: "We will tolerate nothing that will put that hard won stability at risk."

In a clear reference to the firefighters' dispute, Mr Brown warned that public sector pay rises had to be sustainable and justified by productivity increases.