* Conservatives seek to project image of economic prudence
* But deficit reduction plan far behind due to recession
* Conservatives lag opposition Labour party in opinion polls
* Proposes shale gas tax breaks and employee share plan
By Matt Falloon and Guy Faulconbridge
BIRMINGHAM, England, Oct 8 Britain's
Conservatives would slash government spending on welfare by 10
billion pounds ($16 billion) a year if re-elected, finance
minister George Osborne said on Monday, though he offered few
ideas on how to bring the economy out of recession.
The 2015 election is likely to be decided on the health of
the economy, the pace of deficit reduction and the areas of
spending and taxation on which each party would focus to balance
stretched public finances.
The Conservatives, who had bet that growth would reduce the
deficit and help them win the next election, are struggling with
a recession and a series of blunders which have put them about
10 points behind the opposition Labour Party in opinion polls.
Chancellor of the Exchequer (finance minister) Osborne and
Prime Minister David Cameron are trying to use their party's
annual conference in Birmingham to project an image of economic
prudence and have promised more spending cuts across the board.
They hope voters will welcome a further 10 billion pounds of
cuts in welfare spending - an area often portrayed in the media
as rife with scroungers and waste.
"How can we justify giving flats to young people who have
never worked?" Osborne told party supporters before a large
Union Jack-design backdrop at a party conference whose slogan is
"Britain can deliver".
"We will have to find greater savings in the welfare bill,"
But his plans may cause tension with the government's
Liberal Democrat junior coalition partners. Osborne dismissed
their calls for a "mansion tax" on expensive homes or a further
tax on the wealthy.
"This party of home ownership will have no truck with it,"
he told the conference. "The great bulk of savings must come
from cutting government spending - not increasing taxes."
The Lib Dem business secretary, Vince Cable, said: "As far
as we're concerned we haven't had a formal negotiation about
this. Clearly, if they are reluctant to move on things we
consider fair taxation, it's going to be difficult for us to
move on things that matter for them."
Cable, on a visit to Nigeria, said the issue would be "a
dividing line we will be perfectly happy to campaign on in the
next general election".
Osborne, a close Cameron ally who was booed by crowds at a
Paralympics medal ceremony last month, said Western democracies
would lose ground relative to wealthy emerging economies unless
they reformed welfare, education and tax.
In the 35-minute speech, Osborne said the Conservatives must
appeal to those who aspired to improve their situation, adding
it was a delusion to believe public finances could be put back
on track by raiding the "wallets of the rich".
Britain's welfare budget is estimated at 207 billion pounds
($335.2 billion) in 2012/13 - almost a third of total spending.
Labour, which wants to see more taxes on banks and the rich,
says Osborne has cut spending too quickly and choked demand.
The government says softening its austerity plan would endanger
Britain's recovery by putting its low borrowing costs at risk.
But many Conservative lawmakers are worried that Osborne
cannot revive growth. In one of the biggest set-piece speeches
of the political calendar, the 41-year-old offered few new ideas
on how to nurture Britain's stagnating economy back to health.
Osborne's March budget forecast he would have to cut
borrowing by 49 billion pounds in the two years following the
2015 election, after weak growth put paid to his plan to
eliminate the record deficit before the election.
Osborne has staked his reputation on preserving Britain's
AAA sovereign credit rating. A 375 billion pound central
bank-funded bond-buying drive has reduced the cost of government
borrowing to record lows.
But the underlying budget deficit has risen by a fifth so
far this year compared to the same period last year and public
sector debt rose to more than 1 trillion pounds at the end of
August - 66 per cent of gross domestic product.
Investors say Osborne, who announces revised economic and
borrowing forecasts on Dec. 5, will be forced to either cut
spending more deeply or extend austerity well after the next
election to honour his pledge to tame the deficit.
Osborne has refused to say how far behind schedule his
deficit reduction plan is but he rebuffed critics who say he
should pump up demand with government spending.
"Our critics would gamble everything: our credibility, our
financial stability, our low interest rates, the cost of our
debt they would risk everything on the dubious idea that a few
billion more of spending would dramatically improve the fortunes
of the trillion-and-a-half pound British economy," he said.
Osborne said he would allow companies to offer shares in the
business to new employees in return for giving up certain
dismissal and redundancy rights. He also said shale gas could
get generous tax breaks.
Shaving more off the welfare budget would allow cuts in
other government departments to be held at a similar pace as is
being enforced in current spending plans which run until the end
of the 2014/15 fiscal year, according to Treasury calculations.
The government's next spending review, expected before 2015,
will cover much of the 2015-2020 parliament and set the tone for
the election battle.
The Lib Dems' Cable said Osborne's plans were "an entirely
hypothetical discussion" about a budget that would ultimately be
the responsibility of whoever won the next election.
"I've made it very clear we're not making commitments on
spending levels into the next parliament," he said.