LIKE A man who has found his cause at last, Gordon Brown stepped into the G20 pulpit in Washington yesterday to call for concerted tax cuts to rescue the global economy. He told world leaders that he wanted to see "quick action results" on tax cuts and public spending increases. Back in the UK, chancellor Alistair Darling will have been mired in devilish details as he prepares for his pre-budget report in eight days' time. He and the PM cannot afford a repeat of the embarrassing climb-downs over capital gains tax and non-domiciled workers that followed last year's speech.

Bank of England governor Mervyn King underlined the scale of the challenge last week when he predicted that the UK economy would shrink by between 1.5% and 2% next year. Not only is this far worse than the two quarters of more modest declines that the bank forecast only three months ago, it also predicts the UK's worst economic performance in 29 years. There were also dark mutterings about the prospect of deflation for the first time since the 1940s, indicating that any policy blunders could incapacitate the economy for a generation to come.

In Scotland, there was an extra bombshell. Contrary to our habit of slowing and growing more modestly than the UK as a whole, the respected Fraser of Allander Institute predicted that the near-collapse of HBOS and RBS meant that we could expect the nastiest recession in the country. If Darling has to get it right for the UK, this seems doubly true as far as Scotland is concerned.

Labour sees fiscal measures as the crucial third line of defence in the country's battle to stay on its feet. It comes after the government's £500 billion banking bail-out, as much about easing crunching credit for consumers and businesses as saving the banks, and the Bank of England's shock 1.5-point cut to the base rate to 3%, two weeks ago.

Astonishingly, these measures may not have been enough, and we can now expect between £10bn and £15bn of tax cuts, rebates, benefits hikes and so forth to get consumers back to the tills this Christmas.

Everybody agrees that such largesse is desirable, but some wonder whether we can afford it. Labour's heavy public spending programme has already seen the budget deficit near-double to £5.9bn in the year to September, sending the debt-to-GDP ratio crashing through the 40% barrier that Brown once imposed on himself. The debt level is already bound to keep rising as the recession drags down tax revenues. This is particularly true since the financial services sector was such a big taxpayer, and some worry that Britain's reputation for economic stability could be on the verge of collapse.

Observers look to examples such as Hungary and Denmark, where currencies have come under pressure from nervous investors selling in high volumes, and wonder if the same thing could happen here. This could force us to follow Denmark and raise interest rates - normally the least desirable option in a recession - to defend the currency. In Denmark's case the predicament has even prompted the proudly eurosceptic nation to consider a referendum next year over joining the euro.

"We are treading a line between keeping the economy going and losing the confidence of investors," says Douglas Adams, economic adviser to Ernst & Young, which publishes the Scottish Item Club quarterly forecasts. "The fall in the pound may be mostly about the rising dollar, but it does suggest that international investors don't necessarily see the UK as being a great place in which to have their money. There are also hints that UK gilts government bonds are not being bought as much either."

Although on balance Adams still sees a currency crash as unlikely, he says that Brown's recent bullish language on tax cuts is about testing the water to see how investors react.

Professor Brian Ashcroft, policy director of Fraser of Allander, says he is not concerned. He points to countries like Italy (104%), Japan (196%) and even the restrained Norwegians (75%) as evidence that British debt is manageable by worldwide standards, weighing in at just 49th in the league table (see chart).

"There's plenty of room for manoeuvre, albeit that taxes will have to rise or public spending will have to be cut in the medium term," he says.

Yet this overlooks the fact that Britain's debt has been vastly understated for years thanks to massive public-sector pension liabilities and the £100bn-plus public-private finance initiatives that have been deliberately kept off the national balance sheet. Throw in the astronomical cost of the banking bailout and the debt is clearly much higher than it looks.

While Ashcroft argues that UK debt could raise to 100% of GDP, Adams fears this could be too high, particularly in a recession when investors are more nervous.

"The markets could get twitchy before that. You have to remember that the UK and particularly Scotland is seen as being exposed because of the strength of the financial sector, which is the source of a lot of tax revenue," he says.

It is for these reasons that the Conservative opposition has been talking much more cautiously than the government. The Tories have been saying that any fiscal measures should be funded, meaning that the outgoings of the national budget should be reduced to cover them. Their proposals include exempting national insurance contributions up to £2500 for firms that give jobs to people who have been unemployed for over three months; a 1% cut in national insurance contributions to companies that employ five people or less; and a six-month VAT deferment for small and medium-sized businesses.

But as grave a worry as the national debt is, most observers seem to think that now is the time for radical measures. The fact that shadow chancellor George Osborne's job appears to be on the line over internal criticism of the party's economic policies indicates that many in his party are thinking the same thing.

Even Robert Chote, director of the right-leaning Institute for Fiscal Studies and a strident critic of the budget deficit, says: "Osborne gave a speech a couple of weeks ago saying that we should try monetary policy cutting interest rates and devaluing the pound and wait until the scope has been exhausted. Under normal circumstances, that's very sensible advice, but at the moment because of the uncertainties I am not sure I would want to put all of my eggs into the one basket."

He argues that Darling will be able to reassure the international markets to some extent by making pledges next Monday to raise taxes or cut spending once the economy starts to pick up.

The other key question is whom the measures need to target, with everyone from poverty charities to big business arguing for a slice of the pie. "You need to target the people that are relatively less well off," says Ashcroft. "If you give it to the middle classes, they save it, but the poor spend most of what they have."

This points to populist moves like raising benefits and cutting lower-band income taxes, although Robert Chote argues that VAT cuts are more effective than income tax cuts because they have a greater effect on buying patterns. This is a snub to the Liberal Democrats, who have been arguing for a four-point cut to income tax rates.

David Lonsdale, deputy director of CBI Scotland, which represents business interests, has been calling on the Scottish government to pass on to business any increases to its budget that emanate from larger returns at the Treasury in order to bolster investment. Others such as Tesco chief executive Terry Leahy have been calling for cuts to corporation tax to help the whole UK business sector.

Most economists agree that small businesses need bolstered more than large ones, but beyond that Downing Street mood music suggests that business must wait in a long queue behind more vulnerable sectors of society.

Jeremy Peat, former chief economist at RBS, says: "The cuts should be focused on measures that will immediately or very quickly increase demand. If you stimulate demand, you are helping business, albeit not directly. If one can find other ways of softening the blow for smaller businesses, fine, but the crux of the measures really have to be on the demand side."

Chote agrees with this argument, pointing out that business cash flow will also be assisted by any cuts or deferments to national insurance contributions. He adds that housing is another area that should be low down the list of priorities. After the government's previous moves to raise the stamp duty threshold proved ineffective, he believes there is no choice but to "let the housing market adjust".

All this and more will doubtless be swirling in the chancellor's cauldron over the next few days. All too aware that a false move could cause disaster, the eyes of the world will be watching to see to what extent those who claim to have the answers for global recovery will practise what they preach.