* UK's Osborne to present budget update around 1230 GMT
* Weak growth threatens debt and deficit reduction targets
* Cameron tweets UK is on "right track and making progress"
* UK service sector almost grinds to halt in November
* More infrastructure spending, welfare cuts expected
By Matt Falloon and David Milliken
LONDON, Dec 5 More austerity looks certain when
British finance minister George Osborne presents a half-yearly
budget statement on Wednesday, even if he tries to juggle some
spending around to ease the pain.
A darker economic outlook means Osborne is likely to commit
to further spending cuts years into the future to save his
flagship deficit reduction plan, though he also plans some new
investment to sweeten the pill in the short term.
Osborne, who will update parliament with new growth and
budget deficit figures just after 1230 GMT, may have to admit
borrowing will rise this year -- an embarrassment for a man who
put frugality at the heart of the government's policy.
His austerity targets are under threat and a sluggish
economy has played havoc with the Conservative-Liberal Democrat
coalition's original plan to eliminate a large structural budget
deficit before the next parliamentary election due in 2015.
Prime Minister David Cameron sent out an early message on
Twitter after Osborne briefed the cabinet on the forecasts,
saying: "We are on the right track and making progress."
However, depending on how bad the independent Office for
Budget Responsibility's growth and borrowing estimates turn out
to be, Britain could be in danger of losing its prized triple-A
credit rating before long.
Growth in Britain's service sector slowed to a snail's pace,
a closely-watched Markit/CIPS survey showed, suggesting the
economy could be on the verge of contraction again.
The chances of Osborne masterminding a strong recovery in
time for voters to feel the benefits before a 2015 election
appear to be shrinking. Only one in five voters trust him to fix
the economy, according to a Comres/ITV News poll.
"The picture of stagnation is a problem," said Rob Wood, an
economist at Berenberg Bank, arguing that Osborne will probably
have to announce more austerity for the years after the 2015
election. "Deficit reduction has gone into reverse this year."
The economy grew one percent in the third quarter, bouncing
back from three quarters of decline, but few expect a roaring
recovery next year without some solution to the protracted debt
crisis in the euro zone, Britain's main trading partner.
In the absence of the strong growth predicted when Osborne
took the reins of the Treasury in 2010, he has been forced to
extend spending cuts well beyond the next election. He may have
to stretch out those cuts even further into the future.
Back in March, the OBR forecast growth of 0.8 percent this
year, 2 percent in 2013 and nearly 3 percent thereafter.
Economists polled by Reuters now expect output to fall 0.1
percent this year, followed by 1.1 percent growth in 2013 and
1.7 percent in 2014.
CUTTING TOO FAST?
Critics accuse Osborne of strangling growth by cutting
government spending too fast and, in turn, scuppering any hopes
of reaping the tax revenues needed to deal with Britain's budget
deficit -- which hit a record above 11 percent of GDP shortly
before the 2010 election.
"Wednesday's Autumn Statement on the economy is a chance for
... Osborne to recognise things haven't worked out as he
promised and try a different approach," Ed Balls, economy
spokesman for the opposition Labour Party, said on Monday.
"He should take the opportunity to do so, because the
country will not forgive him if he puts political pride first
and ploughs on recklessly with a failing plan."
Osborne's supporters say that changing course now would
unsettle financial markets, drive up the cost of borrowing and
put Britain's economy in even greater jeopardy.
Instead, the Conservative will juggle the numbers to find
money for investing in infrastructure, while holding fast to his
austerity plan -- even if that means more spending cuts to make
up for lost tax income.
"To turn back now ... would be a complete disaster for our
country," Osborne told the BBC on Sunday.
He will detail 5 billion pounds ($8 billion) of spending on
schools and transport on Wednesday, largely paid for by cuts
across government departments over the next 2-1/2 years, and
flesh out plans for a new clampdown on tax avoidance.
A strategic plan for Britain's gas production industry is
also expected, following an October announcement of tax breaks
for the fledgling shale gas sector.
Osborne will argue that the burden of any extra austerity
must be spread across society, with further cuts to the welfare
budget and some form of taxation on the wealthy, possibly a
property tax and a limit on pension tax relief.
It is unclear how a 35 billion pound windfall from the Bank
of England's 375 billion pound asset purchase scheme will be
accounted for in the public finances, but it is a timely gift
for Osborne and will reduce Britain's debts.
The OBR may well extend the time needed before Britain's
structural current budget returns to balance by a year to
And Osborne may be forced to abandon one of his key fiscal
policy rules -- to see debt falling as a percentage of Britain's
national output by 2015/16. He could replace that rule with
something less specific to keep markets on side.