Osborne to admit growth, borrowing disappointment

LONDON (Reuters) - Chancellor George Osborne will face a difficult task defending his austerity programme on Tuesday, when he is expected to unveil forecasts showing much weaker growth and a borrowing overshoot of at least 86 billion pounds over four years.

Osborne's autumn budget statement at 12:30 BT is expected to show independent growth forecasts slashed for the next couple of years, reflecting the rapid deterioration of the economic outlook since the March budget.

The Office for Budget Responsibility, the body Osborne set up just over a year ago to produce economic forecasts free from ministerial interference, is expected to slash its March forecasts - 1.7 percent growth in 2011 and 2.5 percent in 2012 - by at least half, bringing them more into line with most private sector analysts.

That means public sector net borrowing is likely to fall more slowly than the OBR predicted 8 months ago.

People familiar with the OBR's forecasts say it will fall to around 129 billion pounds in 2011/12 rather than the 122 billion forecast, and 117 billion in 2012/13, rather than 101 billion.

"The Chancellor's fiscal targets further out now look unattainable under the current public spending and revenue plans, given likely extended weak economic activity," said Howard Archer, economist at IHS Global Insight.

The higher borrowing forecasts will leave Osborne with a wafer-thin margin to meet the coalition government's fiscal targets, which require a budget surplus for non-investment spending within five years, as well as a falling ratio of public debt as a share of GDP by 2015/16.

Speaking over the weekend, Osborne was keen to stress that he would achieve his aim to eliminate the structural budget deficit over a rolling five-year period.

"We have got a deficit reduction plan that has brought us record low interest rates," Osborne said.

"We are absolutely going to stick to that plan because that is what is helping Britain weather this international debt storm and is also helping us lay the foundations of a stronger economy."

LOW BORROWING COSTS

Britain has enjoyed record-low interest rates on its debt thanks to its perceived status as a safe-haven for investors amid the euro zone's debt turmoil. This will help alleviate the pressure on the public finances as it reduces the government's debt interest payments.

The yield on ten-year gilts was trading at 2.3 percent on Monday, well below the 3.8 percent average rate projected by the OBR in March.

Plugging the figures into the OBR's "ready reckoner" shows a resulting debt interest saving of around 21.5 billion pounds up to 2015/16 - assuming no sudden jump in yields.

"That demonstrates the value of fiscal credibility," said a Treasury official.

NO WIGGLE ROOM

Analysts caution that backing off from austerity, even slightly, would risk throwing Britain back at the mercy of bond markets who have already downed three euro zone economies and now threaten Italy and Spain.

Recognising that he has little scope to alter Britain's short-term economic prospects, Osborne will on Tuesday focus on measures that will boost growth in the longer term, such as promoting lending to small businesses and encouraging private sector investment in infrastructure.

He plans to tap British pension funds to provide the bulk of up to 30 billion pounds of investment in big building projects, while the government will underwrite 20 billion pounds of loans to smaller companies struggling for credit.

The Conservative-led government must also persuade anxious Britons that it has the right policies to fight unemployment and a squeeze on living standards, while sticking to its strict fiscal consolidation.

One measure likely to appease the government's critics will be a planned doubling of a programme providing 15 hours of free childcare per week to disadvantaged young children, which a government source told Reuters on Monday would cost 650 million pounds over the next three years.

Osborne is also expected to unveil further measures to help small and medium sized businesses, on top of a 20 billion pound credit easing scheme aimed at promoting bank lending to firms.

(Additional reporting by Keith Weir; Editing by Andrew Heavens)