As ever, the 2008 Budget will be shaped as much by politics and the political cycle as it is by economics and the economic cycle. Anyone who doubts that has only to look back a few months to Darling's November 2007 pre-Budget report.

In terms of politics, Darling will have to balance three potentially conflicting pressures on 12 March:
• First, he will need to reassure his own party that the government has a convincing and popular direction of travel, and a good story to tell the electorate. Labour backbenchers are worried by a resurgent opposition and fear the prospect of losing their seats.
• Second, he will want to spike the Tory guns, as he tried to do last November with announcements on inheritance tax, without it seeming to appear that the Conservative Party is setting the political agenda.
• Third, he will be mindful that no general election is likely until after a 2009 Budget. If he gives away too much this year, he will have nothing left in the coffers when the real battle arrives.

Economically, Darling faces harder choices than Gordon Brown ever did. Even in the early days of the Labour government when the "iron chancellor" was determined to stick to his predecessor's plans for tax and spending, he had sufficient political capital to see him through.

Things are tight this year and the government is less popular than it was back in 1997 by some degrees of magnitude.

November's pre-Budget report set out the economic situation that the government expected at that stage, with forecasts for economic growth in 2008 cut back to between 2% and 2.5% (a half percentage point cut) and inflation forecast to be held at 2%.

The latest figures show inflation using the Consumer Prices Index (the government's favoured measure) currently at 2.1%. Economic growth, however, may be more difficult to deliver. Since November, we have seen a crisis in the banking system, rising oil prices, a slowdown in house price growth, and a mounting case of the jitters on the markets.

Into all this, the highly respected Institute for Fiscal Studies has now thrown a further bombshell. It says Alistair Darling will need to increase taxes by £8 billion in 2008 to keep public sector debt below the government's own public sector debt ceiling.

The IFS "Green Budget" suggests that even though the government is already planning to raise the tax burden to its highest level for 24 years and cut public spending to an eight-year low as a share of national income, tax revenues will not grow as fast as the Treasury hopes.

It says that economic growth over the next two years may be weaker than the Treasury thinks, reflecting weaker consumer spending, and reckons there is a one in three chance of a "technical recession", in which output shrinks over two successive quarters.

The IFS is also damning about the government's approach to public sector pay, warning that

"Unpopular decisions to 'stage' pay awards recommended by pay review bodies generate only modest one-off financial savings, make little contribution to the fight against inflation, and threaten to undermine the credibility of the pay review body process."

It further adds that

"The case for using a public sector pay policy to help target inflation is weaker than some recent government statements have suggested. It is certainly not the case that public sector pay increases have to be held to 2% just because the UK has a 2% inflation target. Over time, public sector pay will need to reflect productivity improvements across the whole economy."

However, the IFS has something of a twist in the tail for public sector unions wanting to seize on what it has to say. It says "relatively generous" public sector pensions make public sector workers 12% better off on average than a private sector worker on the same salary.

The government, it suggests, should "expend any political capital it wishes to devote in this area to further reforms to public sector pensions".

Back to what Alistair Darling may do on 12 March meanwhile (since it appears unlikely that he will announce his conversion to the cause of higher public sector pay rises as some sort of Keynsian solution to the problem of slow economic growth). It is sometimes worth keeping an eye out for initiatives that are not strictly the preserve of economic management.

Last year, Gordon Brown used his final Budget to announce that he was scrapping the statutory dispute resolution procedures. Work on that one is still under way. Initiatives on skills and lifelong learning are also always a popular option.

Could Alistair Darling have something similar up his sleeve this year? Only time will tell.

Below: Public and private sector pay trends since 1997

>Source: The IFS Green Budget 2008