Alistair Darling should revise his long-term growth forecasts and lay the groundwork for future tax rises in his Budget announcement this week, an influential report has claimed.

According to the Ernst and Young Item Club’s spring forecast, the Budget comes at a relatively good time for the chancellor.

It says the UK economy is “no longer in freefall”, with GDP expected to contract by 0.1 per cent in 2010, compared to 3.5 per cent this year.

“Alistair Darling has had a good start to the financial year and can face the Commons with a good deal more credit and confidence this Wednesday than he did in November,” said Peter Spencer, chief economic adviser to the Ernst and Young Item Club.

“His part-nationalisation of the banks is now looking like a clever move but the chancellor must lay his cards on the table, revise his long-term forecasts down heavily and announce substantial tax increases for the next parliament.”

But Mr Spencer warned that the backdrop for Wednesday’s Budget remained the “bleakest in living memory”, with the employment, housing and retail markets set to suffer for a further 12 months.

“Although one or two positive signs have started to appear, we face another 12-18 months of serious grief,” he explained.

“Around 900,000 jobs will be lost this year and half a million next. Consumption will fall by nearly four per cent over this period as people worry increasingly about job security.”