LONDON (Reuters) - Chancellor George Osborne handed tax sweeteners to voters and small businesses ahead of a June referendum on European Union membership but warned the economy would grow more slowly than previously forecast.
Cuts in corporation and capital gains taxes and moves to ease income tax for many households were also aimed at pleasing MPs from his own Conservative Party, many of whom are angry that Osborne and Prime Minister David Cameron are pushing to keep Britain in the EU.
Osborne used his annual budget statement to warn voters that leaving the bloc, which Britain joined in 1973, would usher in a period of dangerous volatility. To help boost revenues, he slapped a surprise levy on sugary drinks.
Osborne will miss his own target of lowering public debt as a share of the economy this year and borrowing will be higher than previously thought in the next few years. But he stuck to his centrepiece plan to turn the deficit into a surplus by 2020.
"Financial markets are turbulent. Productivity growth across the west is too low. And the outlook for the global economy is weak. It makes for a dangerous cocktail of risks," Osborne said.
He warned that the outlook would be even worse if Britons voted to leave the EU, adding that the country's official budget forecasters were warning that a "Brexit" could hurt business and consumer confidence as well as upset financial markets.
Cameron has said he will stand down before a general election in 2020 but a British vote to leave the EU would prompt a challenge to his leadership sooner than that - and hammer the prospects of Osborne succeeding him.
Osborne's main rival for the party leadership, London Mayor Boris Johnson, is backing the 'Out' campaign, so Osborne was keen to court members of his own party.
"Very importantly, he's come up with some big tax cuts that are going to be very welcome by people on his own side," BlackRock strategist Rupert Harrison, Osborne's former chief of staff, told the BBC.
"He's come up with enough surprises that should probably push those economic and worry numbers off the front pages tomorrow," Harrison said.
Britain's official budget forecasters linked the growth downgrade to its more pessimistic view on productivity, a stark warning that the economy faced a fundamental problem.
They said the economy would grow only 2 percent this year, slower than the 2.4 percent forecast in November, and by 2.2 percent in 2017, down from November's 2.5 percent estimate. Growth would be stuck at 2.1 percent in the next three years.
Sterling hit a two-week low against the U.S. dollar on the gloomier outlook which could add to the case for the Bank of England to keep interest rates at their record low.
Osborne has created an image for himself as the unflinching guardian of Britain's public finances, and his latest plans showed he was still aiming for a budget surplus by the end of the decade equivalent to 0.5 percent of GDP.
Many economists were sceptical about the chances of Osborne hitting his target even before the latest economic downgrade.
Carl Emmerson, deputy director of the Institute For Fiscal Studies think tank, said Osborne's chances of turning a big deficit in the 2018/19 financial year into a surplus in the next year relied on changes to flows of corporation tax.
"There is a whole chunk of corporation tax revenues that we were going to collect in the next few years that we will now collect at the end of the parliament which miraculously helps his deficit in the year he needs it to come down," he said.
Additional reporting by Ana Nicolaci da Costa, Stephen Addison and the UK bureau; editing by Catherine Evans