* UK faces choice of deeper cuts or longer austerity
* PM Cameron says he will not waver in cutting deficit
* Cameron appeals to powerful anti-EU Conservatives
* UK will block aerospace merger if "red line" priorities
By Guy Faulconbridge and Matt Falloon
BIRMINGHAM, England, Oct 7 Britain will have to
keep cutting public spending to reduce the budget deficit, Prime
Minister David Cameron said on Sunday, underlining the
government's tough task of pulling the country out of recession
while winning back waning public support.
Cameron cited the euro zone crisis in explaining the
problems facing the British economy, comments which are likely
to please the influential eurosceptic wing of his Conservatives
as they gather for the party's annual conference.
"It is a very challenging situation, you only have to switch
on your television set and look at what is happening in the euro
zone. We have got many countries going into quite a deep
recession, these are very difficult times," Cameron said.
An aide said the government was paving the way for the next
phase of austerity rather than signalling bigger than planned
measures, but economists say longer or deeper cuts look likely
after a return to recession cast doubt over its deficit targets.
The next election in 2015 will be fought on the economy and
how best to get the deficit, which peaked at 11 percent of the
nation's annual economic output, under control. Cameron's
Conservative-led coalition planned to all but erase the deficit
by 2015 but has been forced to project two more years of cuts.
Underlying borrowing between April and August was a fifth
higher than last year, suggesting that either bigger cuts or a
further extension of austerity could be on the cards when the
government updates its economic forecasts on Dec. 5.
"We inherited a budget deficit at around 11 percent, it is
down to 8 percent," Cameron told the BBC. Referring to this
year, he added: "It is too early to say where they will end up."
Official figures in March predicted a fall to below 6
percent this year, a target which now looks uncertain.
Abandoning the austerity plan would prove politically
disastrous for the Conservatives, who staked their 2010 election
campaign on it.
"The economy is healing. But it's a longer and harder road
that we have to travel down," finance minister George Osborne
told the Mail on Sunday. "There will have to be further cuts."
The Labour opposition has pulled ahead of the Conservatives
due to public anger about the austerity drive, while support has
dived for the junior coalition partner, the Liberal Democrats.
Pollsters say Cameron will struggle to win an outright
majority in 2015 unless the economy bounces back and the
austerity plan starts to bear fruit.
Labour - which holds a 10 percentage point poll lead - and
the Lib Dems want the wealthy to make a bigger contribution to
reducing government borrowing.
But the Conservatives dismissed the idea of a tax on the
wealthy - such as on expensive homes - and called for more cuts
in welfare spending, comments likely to create further tension
in an already uneasy coalition.
In an effort to woo back middle class voters, Cameron also
announced a freeze in a tax that pays for local services and a
cap on rail fare increases.
"If we want to avoid cuts in things like hospitals and
schools and the services that we all rely on, we have to look at
things like the welfare budget," he said.
Beyond the economy, Cameron also faces problems in his
centre-right party, with some arguing he has not taken a tough
enough line on the European Union and a few calling for a new
leader, such as Boris Johnson, the Conservative London Mayor.
To pacify anti-EU Conservatives, Cameron threatened to use
Britain's veto if the bloc tries to inflate its 2014-2020
budget. He suggested the EU should at some point split its
budget into two - one for the euro zone and one for the
countries outside the common currency, including Britain.
Cameron used the veto last year to keep Britain out of a
European fiscal and economic pact aimed at resolving the euro
zone debt crisis.
"People in Europe know I mean what I say. I sat round that
table - 27 countries, 26 of them signing up to a treaty - and I
said this is not in Britain's interest," he said.
"I don't care how much pressure you put on, I'm not signing,
we are not having it. They know what I am capable of saying, no,
and if I don't get a good deal I'll say no again."
Defence Minister Philip Hammond also raised sensitive
economic relations with EU powers, saying his government would
block a proposed $45 billion merger between Airbus maker EADS
and British defence group BAE Systems if "red
line" priorities were not met.
Tensions have spilled into the open in recent days as
France, Britain and Germany jockey over the role of the state in
what would be the world's largest aerospace group.
"It is not necessary to have no French or German government
interest in the company. It is necessary to reduce that stake
below the level at which it can control or direct the way the
company acts," Hammond told BBC radio.