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Osborne uses tax forecast to soften spending cuts

By William Schomberg and David Milliken

LONDON (Reuters) - Chancellor George Osborne took advantage of stronger forecasts for tax revenues to drop an unpopular plan to scrap some benefits for low-earners and ease other deep cuts, but he stuck to a target for budget surplus in 2020.

In one of several surprise budget moves, Osborne spared Britain's police from the spending reductions that will hit other government departments, a nod to concern about security after the attacks in Paris earlier this month.

"This Spending Review not only ensures the economic and national security of our country, it builds on it," he said in parliament. "We deliver security so we can spread opportunity."

Osborne has made fixing the public finances the centrepiece of his time in office since 2010. But he is only halfway through an austerity push he once planned to have completed by now.

Turning the deficit into a surplus was central to Prime Minister David Cameron's pitch to voters in May's election. If achieved, the ruling Conservative Party could cut income taxes before the next election due in 2020.

Osborne, who is a leading contender to succeed Cameron, told parliament he was now aiming for a surplus of 10.1 billion pounds by the 2019/20 financial year.

That was slightly higher than a previous target announced in July, confounding predictions that he would have to rein in his ambitions for putting the public finances back into the black.

"Today, I can confirm that the four-year public spending plans that I set out are forecast to deliver that surplus, so we don't borrow forever and are ready for whatever storms lie ahead," he said.

Osborne also said he was aiming to borrow less in the current financial year than estimated in July.

He announced tax increases people buying second homes or rental properties and a levy on employers to fund apprentices.

But much of his room for manoeuvre in the coming years came from projections drawn up Britain's independent budget watchdog.

The Office for Budget Responsibility nudged up its economic growth forecasts for the next two years, pencilled in more tax income based on a recent recovery in revenues and changed its modelling for tax and social security contributions, which would also increase government income.

Including lower debt costs with government bond yields low, Osborne had a 27 billion-pound windfall to play with, 19 billion pounds of which he used to soften spending cuts.

Budget experts warned that if the forecasts proved too optimistic, Osborne would be knocked off course.

"The risk for him is that if that turns just a little bit again, as it may well do, then he will either have to do some more in terms of tax increases or come back to those departments and cut them further," Paul Johnson, director of the Institute for Fiscal Studies, a non-partisan think tank, said.

U-TURN ON TAX CREDITS

Osborne announced to cheers from Conservative MPs that he was dropping a plan to make big short-term savings by cutting tax credits for low-earning households - an idea that provoked a rare rebellion in the upper house of parliament.

The proposal was widely seen as a misstep by Osborne after Cameron pledged to make the Conservatives the political party that stood up most for working people.

"I've listened to the concerns. I hear and understand them," Osborne said, adding that the improved outlook for public finances meant he was dropping the cuts plan altogether.

But Osborne said he still planned total annual savings from welfare of 12 billion pounds by the end of the decade.

In a move that irritated some business leaders, money would be raised to pay for apprenticeships from a new levy on medium-sized and large employers, which would be set at 0.5 percent of wage bills.

"Although we finally have clarity over the threshold of the apprenticeship levy, it will hurt larger businesses who will have to pay what is effectively a payroll tax," said John Longworth, director general of the British Chambers of Commerce.

And in a sign that Osborne wanted to show he is sensitive to the concerns of voters, he announced more government support for home-building and the introduction of a new tax on second homes and buy-to-let property purchases by investors.

(Additional reporting by UK bureau,; editing by Richard Balmforth, Guy Faulconbridge, Larry King)