Gordon Brown says it is important to act "now" to help people through the downturn - as the Tories say borrowing more will mean higher taxes later on.
David Cameron has told Gordon Brown to "be straight with the British people" and admit his plans to borrow more will mean "higher taxes tomorrow".
Speaking alongside EC president Jose Manuel Barroso he said many experts backed a "fiscal stimulus" but said it should be "temporary and affordable".
The Tory leader said the PM was planning a "borrowing bombshell which will soon become a tax bombshell".
Business Secretary Lord Mandelson hinted at tax rises - "adjustments" - having to be made "some years ahead".
Mr Brown said the Tories were "out of touch" as there was a consensus across Europe in favour of a fiscal stimulus.
The Tories say the PM wants to "max out the nation's credit card".
The government is expected to unveil tax cuts, funded by extra borrowing, in its pre-Budget report next week.
Chancellor Alistair Darling is widely predicted to unveil a series of tax-cutting measures in his pre-Budget report next week, along with increases in public spending, to create a "fiscal stimulus" to boost the economy.
In a Commons statement on the G20 financial summit at the weekend, Mr Brown said "fiscal action" was needed and said the "downturn" could be shorter and less deep if that was matched across the world.
'Necessary action'
International consensus
But the Conservatives say the tax cuts will be unfunded - paid for by further borrowing, which shadow chancellor George Osborne warned at the weekend could create "a proper sterling collapse".
He said there was an "emerging consensus" around the world on the need for rapid and coordinated action though the use of budgetary measures.
Sterling has lost more than a quarter of its value against the dollar and hit a near-record low against the euro.
But Mr Cameron said there were few words on fiscal stimulus in the "G20 communique"- and those that there were had caveats.
On Monday business group the CBI warned that the UK's recession would be tougher and longer than first thought and suggested unemployment could rise from 1.8m to 2.9m by 2010.
"The real international consensus is that it's only the countries that have been fiscally responsible that are best placed to act now," he said.
We need to focus on the economics here, concentrating on what the government needs to do now in order to make this recession as short and as painless as possible Lord MandelsonBusiness secretary
Everyone knows the prime minister is planning a Christmas tax giveaway, but tax cuts should be for life, not just for Christmas. David Cameron
Asked whether it was rash to call for more borrowing when taxes would inevitably have to rise later, the prime minister said it was "right that we take the necessary action today".
The Tories say British borrowing is among the highest in the world.
He said many experts supported a fiscal stimulus - which meant "helping families and helping businesses now through this difficult position".
Mr Cameron said: "In Britain, more discretionary borrowing now, without knowing where the money is coming from is bound to mean higher taxes later."
"As long as we have a medium term framework for fiscal sustainability then this is the right thing to do," he said.
"Borrowing £30bn now will mean an income tax bill for the average earner of nearly £1,500 later.
Interest rates
"Everyone knows the prime minister is planning a Christmas tax giveaway, but tax cuts should be for life, not just for Christmas. We need real tax cuts not tax cons."
He also said he believed Britain was "better placed" than it had been in the 1990s to deal with a recession as interest rates were low and employment levels high.
Deflation danger
Earlier Lord Mandelson said putting up taxes or cutting spending would "make things even worse" - so to deliver a "fiscal stimulus", borrowing would have to increase.
Mr Brown said the Conservatives had been wrong in all their calls on dealing with the economic crisis - from nationalising Northern Rock to opposing action against share speculation.
They are trying to govern by propaganda and just give you one side of the picture Alan DuncanConservatives
"I come to the conclusion that they do not understand what's happening in the world economy," he said.
The alternative was to "watching the recession grow and doing nothing about it," he said.
He said the danger next year would be deflation, adding: "This seems to be the only party that is now standing against what is a consensus developing across Europe and across the world.
He said taxes may be cut in the "immediate term" while a "medium term adjustment" would be "some years ahead".
Gordon Brown: 'It is right that we support families and businesses'
Challenged that it would mean taxes going up after the next general election - when the Conservatives could be in power - he replied: "Rather than talk politics I think we need to focus on the economics here, concentrating on what the government needs to do now in order to make this recession as short and as painless as possible."
"That unless you take the fiscal action that is necessary now, and help businesses and families now, you are undoing any benefit that can come from monetary policy and cuts in interest rates."
'Absolutely outrageous'
The prime minister was jeered by Tory MPs as he said that the economic problems had "started in America" and Mr Cameron told him he had said it so many times it was "starting to sound ridiculous".
But shadow business secretary Alan Duncan said Lord Mandelson had confirmed what Mr Brown would not - that taxes would rise.
'Cash bribes'
"They are trying to govern by propaganda and just give you one side of the picture whilst postponing the consequences of the other side of the picture. That is why I think that what they are doing is dangerous and deceitful."
But Mr Brown said: "Even the Americans agree the financial crisis started in America."
He said it was a judgement call as to "whether you pour debt on debt now, for what could be an illusory stimulus which causes a lot of pain later, or whether you take a long-term fiscally responsible view as we are doing, which looks at the British economy over more than just the next few months".
Liberal Democrat leader Nick Clegg said it was right to "give money back to people" but, instead of borrowing for a "one-off tax cut", he could get a permanent reduction for many by restructuring the system and ending "loopholes" for the wealthy.
The Liberal Democrats' Treasury spokesman Vince Cable says any tax cuts have to be "substantial" - in the region of £15bn-£20bn - if it was to get people spending and restore confidence.
"The right thing to borrow for is not short-term cash bribes but long-term capital investment in infrastructure the country needs anyway," he added.
He also said that the government's recapitalisation of banks, which he supported, was running into some problems.
Earlier in a BBC interview Business Secretary Lord Mandelson hinted at tax rises - "adjustments" - having to be made "some years ahead".
He said: "Last week, Alistair Darling said that there would be no government directors of the semi-nationalised banks.
His Conservative shadow Alan Duncan said Labour were "trying to govern by propaganda and just give you one side of the picture whilst postponing the consequences of the other side of the picture."
"The banks have been given all this money, they're now going to be given a completely free rein and that's absolutely outrageous, because the banking system is completely gummed up."
