Osborne readies tight UK budget even as elections approach

By William Schomberg

LONDON (Reuters) - Chancellor of the Exchequer George Osborne will bear few gifts for voters when he announces his annual budget next Wednesday, little more than a year before the next national election.

Osborne looks determined to stick to his message that Britain is only half-way through the belt-tightening plan he launched in 2010 to fix Britain's still wide budget deficit.

The ruling Conservative Party is lagging the opposition in opinion polls even as Britain grows faster than other developed economies, and some of its lawmakers are demanding tax cuts to boost their chances in the May 2015 elections.

But Osborne and Prime Minister David Cameron are unlikely to heed them much beyond announcing what is expected to be the latest in a series of increases in the amount of money people can earn before paying income tax.

"When you've got a deficit of circa 110 billion pounds and you want to cut it to zero, it's going to look odd to start talking about giveaways," said Carl Emmerson, deputy director at the Institute for Fiscal Studies, a think-tank in London.

Osborne is betting that when Britain goes to the polls in May 2015, voters will stick with his plan to wipe out Britain's budget deficit during the next five-year parliament.

The opposition Labour party promises a slightly less aggressive cost-cutting plan with more spending on house-building and infrastructure.

But Labour is struggling to recover its economic credibility among many voters who see the deep cuts in spending as the price they are having to pay for policies during its time in power until 2010.

Osborne is also hoping that by May next year, voters will be feeling some improvement in their diminished living standards, assuming that Britain's economic recovery does not falter and wages finally start to outpace inflation.

HANDS TIED

With his hands largely tied by his promises to keep on cutting Britain's deficit, Osborne's vote-winning options in the budget look slim.

Britain's budget deficit totalled 11 percent of gross domestic product when the coalition came to power and is forecast to be about 7 percent in the current fiscal year, still much higher than other big economies in the European Union.

As well as the expected increase in the personal income tax allowance, he might extend a tax break to encourage business investment which is due to expire at the end of 2014.

Osborne said last month he wanted to boost investment and exports, something that would reduce the unsustainable reliance of Britain's economy on household spending.

Manufacturers also want help to reduce their electricity bills which they say are among the highest in Europe.

Helping factories might give Osborne and his Conservatives a chance redress their image as a party focused on England's south in the eyes on voters in the more traditionally Labour-supporting north.

Other possible measures in the budget include ways to encourage more home-building and new road and rail projects.

Economists will look closely at the small print of the official forecasts produced by the independent Office for Budget Responsibility on which the budget is based.

The OBR has estimated that the amount of spare capacity, or slack, in Britain's economy is greater than the Bank of England believes. If the OBR is wrong, that would mean that more of the budget deficit is structural, rather than a result of the economic downturn, and could require even more spending cuts or tax hikes than Osborne has already signalled for the coming years.

With the election looking like it will be tight, Osborne might be tempted to show more generosity towards voters at a half-yearly budget update due in November or in December or in the budget in March next year, just weeks before the election.

Peter Kellner, president of polling company YouGov, said promises of big new spending next week would damage the Conservatives' standing among voters, given their insistence on austerity. But that might have changed by the time Osborne gives his March 2015 budget, just weeks before the election.

"Next year, if there's been steady growth and the deficit has come down more than expected, then he can sell it as the reward for nearly five years of prudence," Kellner said.

(Editing by Jeremy Gaunt)