For the first time in many years, the real story of budget week will not be the rabbits pulled out of the hat in the chancellor’s speech, but the true state of the British economy.

With Alistair Darling forced once again to downgrade his predictions for economic growth, one of the largest budget deficits in the developed world, a nationalised bank to account for and a string of disastrous tax policies to either abandon or implement, he must wish he could do what most chancellors do in their first budget and blame his predecessor. In Gordon Brown’s government, that’s not an option - and in any case some of the most serious mistakes have happened on Darling’s short and unhappy watch.

So the chancellor will place all the blame on the US subprime housing market. But the challenge for any government’s economic policy is not how it copes when the rest of world is growing strongly, as it has over the past 15 years, but rather how it copes when times are tough. The credit crunch is international in reach, but it is Britain that, according to most observers, is the least well prepared. We did not fix the roof when the sun was shining.

Now, at the very moment when the rainy days are upon us, the current chancellor is planning to hit us with rising taxes. From this April, 5.3m low-paid people will be worse off as a result of doubling the 10p income tax band. Small business tax is set to rise 2%. Entrepreneurs face a £700m tax rise on capital gains. I will grant Alistair Darling this: his answer to the credit crunch is unique. I know of no other government in the world whose response to the economic slowdown is to raise taxes.

So what should Darling do instead in his first, and quite possibly last, budget?

First, he needs to restore stability to the public finances. Only three major countries in the world have a worse budget deficit: Pakistan, Hungary and Egypt. The chancellor ought to tell us in his opening paragraph that he is overhauling the discredited fiscal rules that were supposed to stop this happening. A powerful independent body should be judge and jury in the future. And Darling needs to make it clear to the markets that government spending will grow more slowly than the trend rate of the economy not just for the next three years but over a whole economic cycle. He needs to commit to sharing the proceeds of growth, for that is the path to stability.

Second, the chancellor should boost the ability of British companies to compete in these difficult times and over the long term. A decade ago we had the 4th lowest business tax rate in Europe. Today we have the 19th lowest. It is a millstone around the neck of British firms. I believe there is a compelling case for reducing the corporation tax rate from 28% to 25%, fully paid for by reducing complex capital allowances. This will create a much simpler business tax system and a much lower tax rate. It will send a clear signal that Britain is open for business. And it will be a real shot in the arm for British companies as they meet the challenge of competing in a global economy. We should also stop the damaging 2p rise in the small companies tax rate that Gordon Brown planned, by scrapping the intrusive new allowances. Small businesses are the lifeblood of a vibrant economy and a tax hike now would be a disaster.

Third, Darling should abandon his ill-considered increase in capital gains tax. And he should abandon his changes to nondomicile tax, and instead adopt the plan I set out last autumn to levy a £25,000 nondom charge in return for a promise not to pry into offshore accounts or change remittance rules. That would stop the threatened flight of talent from the City. Then he could also afford to take 9 out of 10 first-time buyers out of stamp duty, which would be a huge boost to aspiring families at a time when getting a mortgage is proving more and more difficult.

Fourth, the chancellor should say clearly: there will be no more stealth taxes. Few things have done more to corrode trust in government than Gordon Brown’s habit of sneaking through stealthy tax rises in the budget small print. I have asked Geoffrey Howe to look at permanent changes to the way tax law is made that would improve public confidence and transparency.

In the meantime, Alistair Darling could avoid the temptation to use climate change and binge drinking as an excuse for a big rise in stealth taxes. Rises in green taxes should be offset by a reduction in taxes elsewhere. Put up taxes on alcopops and super-strength cider to tackle binge drinking, as I argued last week, but then use the extra revenue to cut tax on low-alcohol beer and cider. Families struggling with the rising cost of living do not need new stealth taxes.

Fifth, no country can thrive in an age of globalisation when it has 5m people languishing on out-of-work benefits. There are 100,000 more children in poverty than there were last year, and fuel poverty has doubled. The chancellor should back up the noble aspiration to end child poverty with a change of welfare policy that would actually help us all achieve it. He should abandon his dogmatic opposition to using the welfare budget to fund welfare-to-work schemes. And he should adopt our plan to tackle the stock of over 2m people languishing on incapacity benefit, not just new claimants, and use the money saved to increase the working tax credit for low-paid couples who are in work. That would lift 300,000 children out of poverty.

Finally, Alistair Darling has to show that he is his own man. Governments cannot thrive with weak chancellors. This is the week when he can make a break from the imprudence and imperial ambitions of the previous chancellor that have left Britain so ill-prepared for the tough times ahead.

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