Osborne boxed in by austerity on budget day

LONDON, March 20 Tue Mar 19, 2013 8:02pm EDT

LONDON, March 20 (Reuters) - British finance minister George Osborne faces the daunting task on Wednesday of delivering another austerity budget to a country impatient with near-zero growth.

The chancellor of the exchequer, as he is formally known, will make more cuts to day-to-day public spending as he tries to free up some cash for investment. He is also likely to announce another round of weaker economic forecasts.

Despite a slump in opinion polls, Osborne and Conservative Prime Minister David Cameron are sticking to their push to fix Britain's budget deficit and rising public debt, hoping for a recovery before they fight for re-election in two years time.

Cameron's spokesman prepared the way for another round of belt-tightening, saying on Tuesday that the country still faced "an unprecedented peacetime economic crisis", more than four years after the near collapse of the banking system.

Committed to fiscal austerity, Osborne may seek to get the Bank of England to do more with monetary policy to mend the weak growth that has knocked the government off its fiscal targets.

When the government took office in 2010, the budget deficit was a hefty 11 percent of gross domestic product (GDP), hammered by a global economic slump and years of over-reliance on London's giant international banks to provide tax revenues.

Britain's independent budget watchdog at the time predicted the deficit would fall to 1.1 percent of GDP by 2015-16, in part due to the tough cost-cutting measures laid out by Osborne.

The deficit in the fiscal year ending this month, on a like-for-like basis, is likely to be 7.7 percent of GDP, the watchdog said in December, among the highest in the European Union.

Rather than grow by nearly 3 percent this year - as forecast in 2010 - Britain's economy may be back in a recession again, while rising inflation is hurting households.

GROWTH QUANDARY

The government puts much of the blame on the crisis in the euro zone, Britain's main export market. The opposition Labour Party shows no mercy in hammering Osborne for his austerity.

Some inside Cameron's coalition are now showing unease. The Liberal Democrat business minister has questioned whether markets would punish Britain if it borrowed to fund growth.

Business leaders largely agree that fixing Britain's fiscal health should remain a government priority, for now. But John Longworth, head of the British Chambers of Commerce, thinks the government might need to reverse course and borrow more if there is no prospect of growth within six months: "It would be a sort of defibrillator approach to the economy," he said.

Osborne will announce on Wednesday that some government departments will have to cut spending by a further 1 percent in each of the next two financial years, on top of previously announced cuts to ministerial budgets, to provide an extra 2.5 billion pounds for investment.

"If this is the only additional investment in infrastructure in the budget, it will be a huge disappointment," said Chris Leslie, a Labour finance spokesman.

Other budget measures will include tax breaks to help working parents pay for childcare from 2015. There might also be further cut to corporate tax rates and an increase in the tax-free allowance for individuals' incomes, local media have said.

With little sign of strong growth any time soon, Britain could suffer further downgrades of its credit rating. Moody's stripped Britain of its prized triple-A rating last month.

CENTRAL BANK

Many in financial markets will pay most attention to what Osborne says about the Bank of England's remit. He wants the central bank to do more to boost growth on top of the 375 billion pounds it has spent on buying government debt. It has also cut interest rates to a historic low of 0.5 percent.

Osborne may announce a review of the Bank's official remit of targeting inflation of 2 percent, or take the bolder step of making growth less of a secondary objective for the governor.

The pound has lost about 7 percent of its value against the dollar so far this year. Much of the fall is due to speculation that the Bank of England might be encouraged to pump more money into the economy, either before or after its new governor, Mark Carney, arrives from the Bank of Canada in July.

Former monetary policymakers say any changes to the British central bank's remit must be made carefully.

Charles Goodhart, who served at the Bank from 1997 to 2000, argues that its flexible approach to fighting inflation had worked well for the past two decades. "Changing a long-term regime for short-term purposes would be undesirable," he said.

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