Gordon Brown is expected to admit the UK economy is growing more slowly than he expected when he delivers his pre-Budget report to MPs at 1530 GMT.
Mr Brown has already conceded his growth predictions were too high
He is likely to blame high oil prices and a housing slowdown when he cuts his growth estimate of 3-3.5% to about 2%.
But aides say despite a "tough" year the public finances remain "strong".
Shadow chancellor George Osborne warned that "there are likely to be tax increases", while the Lib Dems say Mr Brown will have to "eat humble pie".
Mr Osborne told BBC Radio 4's Today programme the UK now had slower economic growth than 18 of the EU's 25 members and predicted tax increases "on top of what we have had over the last eight years".
Liberal Democrat treasury spokesman Vincent Cable told the BBC: "It's embarrassing... he's now going to have to eat humble pie and explain that it's little more than half what he forecast."
He said international institutions say the reasons for the slower than expected UK growth "are domestic... not due to higher oil prices and a slowdown in Europe".
But Mr Brown told Cabinet colleagues his pre-budget report, which gives him a chance to update MPs on the economy and his future tax plans, would show how Britain's economy is "passing the test of stability".
EXPECTED PBR HIGHLIGHTS:
A shared-ownership scheme to enable people to buy cheaper houses
A tax-credit amnesty to help out families who accidentally claim more than they are entitled to
A freeze on petrol duty
More money to fund anti-terrorism policies
His statement would also set out "long-term reforms and long-term investments" with boosts for science, skills, enterprise, creativity and help for "hard working families", he said.
The head of the Confederation of British Industry, Sir Digby Jones, has urged the chancellor not to raise taxes, saying: "Since 1997, we've had 160 different tax rises across the whole of society. We just can't have any more."
Independent forecasters surveyed by the Treasury predict the economy will grow by 1.8% this year, and only 2.2% next year.
The chancellor will also use his pre-Budget report to set out plans to promote house building and home ownership.
They include a levy on landowners whose land has been granted planning permission for development, to encourage them to release the land more quickly for house building.
There will also be more details of a plan allowing first-time buyers to purchase a three-quarter share of properties, with the government and mortgage lenders taking the rest.
Mr Brown is expected to use the time to give his first formal public response to Lord Turner's pensions report.
BBC political editor Nick Robinson said public finances were not "so tight" that the chancellor would not offer some "goodies" to groups such as pensioners.
He said Mr Brown saw the report as the start of a "new political era" and had "his mind on becoming prime minister".
City analysts also expect the chancellor to announce new measures to crack down on perceived tax abuses.
Meanwhile, the Institute of Directors (IOD) has accused the government of living beyond its means and is calling for public spending to be restricted to 1.5% a year up until 2011.
IOD director general Miles Templeman said: "We've had short-term gains from higher spending, but we now risk the long-term pain from the government being just too big."