Britain's coalition at odds over devolving public spending

Britain's Chancellor of the Exchequer, George Osborne, is seen waving after delivering his keynote speech at the Conservative Party conference in Birmingham, central England in this October 8, 2012 file photograph.

LONDON (Reuters) - A plan to devolve public spending to local authorities and businesses in Britain has been held up again by disagreement within the government, people familiar with the situation said.

Michael Heseltine, a former deputy prime minister, last year proposed giving local bodies the chance to bid for tens of billions of pounds (dollars) worth of public funds for infrastructure, housing, skills training and other projects.

Shifting public spending away from central government would make the country more competitive, Heseltine said.

The government, which is seeking ways to boost Britain's near-zero growth rate, had intended to show how it would proceed with the plan when it announces its next budget on March 20.

But given the differences between ministers of opposing political parties within the coalition, it may now announce the launch of a consultation period instead, the sources said.

They said the Treasury, run by Conservative finance minister George Osborne, wants the bulk of the planned single funding pot to be put up for competitive bids by local partnerships between authorities and businesses.

But the Department for Business Innovation and Skills (BIS), led by Liberal Democrat Vince Cable, has reservations about such a large-scale devolution of funding, the sources said.

Officials at the BIS are worried that not enough money will be available for national issues such as Britain's skills shortage which, they feel, are not suited to local solutions.

"There is clearly a very big fault line," said one person.

A spokesman for the BIS said he could not comment on the negotiations. A spokesman for the Treasury said the government would respond formally to Heseltine's report in the spring and declined to comment further.

Differences over other, more fundamental areas of economic policy have emerged in the run-up to the budget.

Osborne and Prime Minister David Cameron have said they will stick to their focus on reducing Britain's budget deficit and debt, potentially limiting the amount of money available for local public spending.

But Cable suggested last week that borrowing to fund more infrastructure spending might not upset financial markets.

(Reporting by William Schomberg; Editing by Louise Ireland)