Alistair Darling has revealed his frustration at the collapse in Labour morale under Gordon Brown, accusing his party – from the prime minister down – of handing power to the Tories without a fight.

On the eve of what many MPs believe could be Labour's final conference as a governing party for a decade, the normally restrained chancellor delivers a stinging rebuke to the entire Labour hierarchy, which he says appears to have lost "the will to live", and warns that a Conservative government would "crash the economy".

His intervention comes as, for the first time, Brown acknowledges the depths of the trouble Labour is in, telling delegates they face the "fight of their lives" next spring – while the Welsh secretary, Peter Hain, concedes that even if the party pulls itself together Labour may be unable to reverse the Tories' poll lead before the election is called.

Faced with the threat of defeat, Darling likens Labour to a gutless football side where the team have allowed their heads to drop well before the final whistle. "We don't look as if we have got fire in our bellies," he says in an interview with the Observer. "We have got to come out fighting."

Unusually for an arch-loyalist, Darling makes clear that the prime minister is as much to blame as anyone for the loss of self-belief: "From the prime minister, the chancellor, every government minister. It is all our responsibilities."

Tomorrow he will attempt to seize back the initiative on the economy – and deflect Tory claims that Labour is reckless with the public finances – by announcing in his conference speech plans for a new law that will force governments to keep the public deficit under control. This year the deficit has soared to 12.4% of GDP, more than four times the level it was in 2006. Next year it will be 11.9%.

The new legislation is expected to set targets for a year-by-year reduction in the deficit. Ministers will argue that it goes further than Tory plans announced last year for an Office of Budget Responsibility, because Labour's scheme will make it a legal obligation to act responsibly.

In his speech today, Hain will argue that the election could be like 1992, when John Major was expected to lose right up until polling day but pulled off a surprise victory: "If we do our job as a Labour leadership, if you do your jobs at the grassroots, whatever the polls say, when people get into the privacy of the polling booth then I think the next election will be more like in 1992 when everyone expected the government to lose but in the end voters considered the opposition too much of a risk."

With Brown under intense pressure to show that he has not run out of ideas for a fourth term, ministers will today publish a new document highlighting other ideas likely to be included in Labour's manifesto, including new ways of funding long-term care for the elderly, expanding nursery places, scrapping the remaining hereditary peers in the Lords and radical reforms of policing.

"We have spent a hell of a lot on policing and people still don't feel that the frontline service they are getting is good enough," said a source close to Brown.

In his foreword to A Choice for Britain, Brown promises plans for a "post-crisis" world where Labour would govern in the national interest, adding: "By 2015, we want our country to be fairer, greener, more prosperous and democratic… We know this will be the fight of our lives. But we will fight hard because this election is about everything we care about – fairness and responsibility."

Ministers last night predicted that Brown would not face a leadership challenge at the conference, but said the reception for November's pre-budget report could be critical.

The former home secretary, David Blunkett, who remains close to the prime minister, admitted yesterday that a change of leader might give a slight lift in the polls but warned it would not be enough to transform the party's fortunes, urging MPs to focus instead on finding new ideas to reconnect with the electorate.

"I want everyone who is going to conference thinking that 'We'd be better with someone else leading the party' [to ask themselves] what sort of measures would they like the party to present to the public?" he said.

"Otherwise, we are merely down to what particular personality we find slightly more attractive, and we are talking here about whether we increase by two or three per cent."

The only senior figure to break ranks was the former deputy prime minister, John Prescott, who attacked party chairman Harriet Harman for putting too much emphasis on "female rights" and allowing the campaign to drift.

In another sign of the party's woes, a leading Labour thinktank warns today that Brown could be running the "last ever Labour government".

Compass argues that unless the prime minister offers a referendum on electoral reform, Labour will suffer defeat followed by the loss of dozens more seats soon after, as Scotland opts for independence and David Cameron reduces the size of the Commons. The result could be a party with 130 seats incapable of mounting a challenge for power.