CORRECTED-UPDATE 2-UK finance minister wants more welfare cuts, provoking coalition row

Mon Jan 6, 2014 12:53pm EST

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(Corrects 5th paragraph to make clear cuts are planned by the 2017/18 fiscal year, not in the two years after the 2015 election)

By William Schomberg and William James

LONDON Jan 6 (Reuters) - Britain's finance minister announced major cuts to the country's future welfare spending on Monday, spelling out the next phase of a push to fix public finances and straining ties within the coalition government.

With an election due in 16 months and the government facing calls to put more money in people's pockets after years of austerity, George Osborne rammed home his message that the only way to return the economy to health was to fix its finances.

"As we start the New Year, I want to warn you about a dangerous new complacency around at the moment," he said in a speech at a car-parts plant in Birmingham, central England.

"You hear some talking as if the hard part of the job is done, and we can go back to the bad old habits."

Osborne, a Conservative, said he wanted to slash 12 billion pounds ($19.73 billion) from the country's annual welfare budget by the 2017/18 fiscal year, accounting for about half of an overall 25 billion pounds in annual cuts he said was needed to reduce borrowing and help balance Britain's budget.

His focus on welfare cuts stirred an angry reaction from Deputy Prime Minister Nick Clegg, leader of the Liberal Democrat party which is the junior of the Conservatives in the coalition government.

"I think they're making a monumental mistake," he said. "Yes you need to fill the black hole in public finances, yes you need to finish the job of balancing the books, but you don't do it only on the backs of the poor."

His criticism laid bare one of the key fault lines on fiscal policy that is expected to split the coalition as the election approaches: the Conservatives want to balance the books only by cutting spending, while the Liberal Democrats also want more taxes, for example on expensive properties.

The Conservatives continue to lag behind the opposition Labour party in opinion polls. But they score more highly for economic policy and they regularly blame Labour for running up a budget deficit equivalent to 11 percent of gross domestic product before it lost power in the 2010 election.

Labour's finance spokesman Ed Balls said the need for further spending cuts highlighted what he called a failure by the current government to get Britain's economy growing sooner and wipe out its deficit on schedule. He said Labour's plans to speed up growth would mitigate the scale of cuts needed.

RISKS TO RECOVERY

A surprisingly strong recovery in the economy last year turned Britain from a laggard to a leader in growth terms among the world's big rich nations, though overall output is still below pre-crisis levels.

A survey on Monday showed growth in Britain's dominant services sector slowed unexpectedly in December, but confidence rose and the economy still looks likely to have recorded its strongest expansion since 2007 last year.

However, in his speech, Osborne warned that the euro zone's troubles and a continuing repair of Britain's banking system still posed risks to the recovery and he underscored the need for more belt-tightening.

"The truth is there are no easy options here, and if we are to fix our country's problems, and not leave our debts to our children to pay off, then cutting the welfare bill further is the kind of decision we need to make," he said.

Although Osborne is under pressure from some members of his Conservative party to cut income taxes more aggressively, he made clear he would not be rushing to make further tax cuts.

"If government wants to find a direct way to put money into people's pockets, you do that by permanently cutting people's taxes by permanently cutting the spending those taxes pay for." ($1 = 0.6083 British pounds) (Additional reporting by William James; Editing by Jeremy Gaunt)

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