UK's Osborne to declare austerity push is paying off

Wed Dec 4, 2013 7:01pm EST

* Osborne to present upgraded budget forecasts at 1115 GMT

* Government committed to deficit reduction

* Living standards lag behind strong rebound in growth

By David Milliken

LONDON, Dec 5 (Reuters) - British finance minister George Osborne is set to announce a turning point in his battle to fix the country's public finances on Thursday, but falling living standards mean he cannot declare victory.

A sudden pickup in economic growth means Osborne's goal of fixing Britain's finances is no longer out of reach and he is set to announce the first big fall in projected public borrowing since the coalition took power in 2010 when he delivers a half-yearly update on the budget.

But with Britons due to go back to the polls in 17 months' time, he is also under pressure to help their personal finances.

The opposition Labour Party is campaigning on the idea of a "cost of living crisis" after several years of prices rising faster than wages. Household disposable income is at its lowest level in a decade. Labour accuses Osborne of making the economic downturn worse by insisting on big spending cuts.

Prime Minister David Cameron on Sunday announced plans to fund unpopular environmental levies on energy bills through general taxation, a response to Labour's calls for a state-imposed freeze in household fuel bills.

But on Wednesday, Cameron played down expectations of new tax cuts and stressed his government was determined to eliminate the budget deficit.

"If the economy continues to grow and, as it were, the sun continues to shine, we should be fixing the roof when the sun is shining, as the last government failed to do," he said in a television interview.

The outlook is certainly brighter than it was when the government's Office for Budget Responsibility gave Osborne its forecasts in March, at the time of his annual budget.

Then the OBR predicted growth of just 0.6 percent this year and 1.8 percent for 2014. Those forecasts look set to be raised sharply on Thursday. Last month, the Bank of England predicted growth of 1.6 percent in 2013 and 2.8 percent next year.

Shortly after Osborne begins speaking to parliament at 1115 GMT, the Bank of England is expected to announce it is keeping its benchmark interest rate at a record low of 0.5 percent, even as the recovery gathers pace.

The BoE has adopted a new policy, at Osborne's instigation, that aims to dissuade investors from expecting rates will rise until the recovery is much more established.

HIGHER TAX RECEIPTS

Strong growth has started to boost tax revenue and economists polled by Reuters expect borrowing to be revised down by about 10 billion pounds ($16 billion) in both 2013 and 2014.

A recent sale of government stakes in Lloyds Banking Group and Royal Mail will further reduce borrowing needs, though they will not affect the main OBR deficit metric.

"There will be a sense of relief and improved confidence that things are on the mend," said Brian Hilliard, chief UK economist at French bank Societe Generale.

Borrowing in the current financial year, which ends in March, is still likely to amount to nearly 7 percent of GDP. That is down from 11 percent when the coalition ousted Labour in 2010 but still a big shortfall by international standards and a reminder of how the British economy has failed to recover the ground lost to the financial crisis.

Furthermore, the OBR is unlikely to bring forward the 2016/17 date when it expects Britain to achieve a budget surplus based on the measure long targeted by Osborne, which excludes investment spending and fluctuations in the business cycle.

Nonetheless, there are signs that credit ratings agencies may be re-evaluating Britain's prospects.

Standard & Poor's - the only one of the three major agencies not to strip Britain of its top-notch triple-A status earlier this year - said on Wednesday that it could put its rating on a more stable footing if stronger-than-expected growth looked to have become sustainable.

While the overall shape of Osborne's deficit-cutting plan is certain not to change, there will be tweaks to tax and spending.

Ministries responsible for welfare, justice and business will have their spending cut by an extra 1 billion pounds a year over the next three years, in part to allow lower business taxation and more investment, as well as free school meals for more children and a tax break for some married couples.

In a reflection of concerns about a price bubble in London's property market, Osborne is expected to announce the introduction of capital gains tax for foreigners who own a British property which is not their primary residence. There is also a chance that landlords may no longer be able to claim tax rebates for mortgage interest.

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