THE Chancellor of the Exchequer holds the fate of thousands of businesses in his hand as he delivers his spring Budget tomorrow.

The onus will be on Gordon Brown to drive forward an economy which has begun to falter in many sectors.

Figures out last week showed manufacturing was suffering worse than most, with the sector contracting for the fourth month in a row.

Retail is another area which is showing signs of wear and tear as global factors conspire against the free spending that has previously been a positive economic signal in the past few years.

Prolonged downward pressure on stock markets, ongoing conflict in Iraq and generally depressed world trading conditions have all taken effect.

The problem for the Chancellor is the need to generate revenue to fund the Government's expansive health and education spending plans.

Mr Brown relied on raising revenue through the backdoor in the past to pay the bills, with a National Insurance hike that already threatens to cripple businesses while cutting the pay packets of individual workers.

Early rumblings suggested that the Chancellor could be gearing up to a "business-friendly" Budget.

Jeremy Peat, group chief economist of the Royal Bank of Scotland, said: "The Chancellor appears to have given an undertaking to the CBI's (director general) Digby Jones that the budget will be business-friendly, with the enterprise agenda at its heart."

Analysts believe that, to a certain degree, the Chancellor has little choice but to pay close attention to finding new ways to support business.

John Battersby, KPMG's head of strategic tax policy, said: "While the Government can live with the financial consequences of a cyclical downturn in the economy, there is a growing risk of structural damage which threatens the Chancellor's long-term ambitions."

Mr Brown needs 2.5 per cent annual growth in the UK economy to achieve the necessary revenue to support planned spending.

He has relied on higher borrowing to make up for a shortfall in tax receipts but experts suggest this is not a strategy that can be supported long-term.

The Chancellor will undoubtedly have to act to improve this situation, and tomorrow could well see a response to the problem.