LONDON The government will underwrite 20 billion pounds of loans to smaller companies in a package of measures to boost the economy, while sticking to a strict austerity programme, Chancellor George Osborne said on Sunday.
Osborne is under pressure to find ways to revive a stagnant economy and avoid a return to recession without compromising a deficit-cutting spending squeeze.
The "credit easing" programme is expected to form the centrepiece of Osborne's autumn budget statement to parliament on November 29, which will also details plans to funnel billions of pounds of private investment into infrastructure projects.
The government will back loans to be made by banks to small- and medium-sized companies to cure a shortage of credit that has hampered Britain's economic recovery.
"We are making available 20 billion pounds for the National Loan Guarantee Scheme, however it sits within an envelope that could be as large as 40 billion pounds," Osborne told BBC television.
He said the government's backing would help cut the interest rates firms pay on their loans by a fifth, or 1 percentage point.
Osborne and his coalition government has staked its reputation on eliminating a budget deficit that was a record 11 percent when it came to power last year by implementing the deepest spending cuts in a generation.
That has limited his room for manoeuvre, cutting off the route of greater deficit-funding to stimulate growth and drawing criticism from the Labour opposition who say the austerity programme is too tight and should be relaxed.
The neighbouring euro zone crisis has compounded the challenge, with the government's fiscal watchdog expected to follow other forecasters next week by slashing its growth outlook for 2012 by more than half.
The British economy has barely grown over the past 12 months, with households cutting spending as wages fall behind inflation and unemployment rises.
The Ernst & Young ITEM Club, which bases its quarterly report on finance ministry models, downgraded its 2011 growth forecasts on Sunday to 0.9 percent from the 1.4 percent it predicted three months ago.
But Osborne said it was the credibility gained by Britain's adherence to its fiscal plan which meant he was able to create the loan guarantee scheme.
"There are many governments at the moment that could not operate a scheme like this because (they) would not be regarded as creditworthy enough to do it," he said.
British government debt has largely been treated as a safe haven by investors, keeping down borrowing costs despite a rapidly darkening growth outlook. Osborne said he remained confident of meeting his deficit-cutting target.
"We have got a deficit reduction plan that has brought us record low interest rates, that has earned us that triple A credit rating," said Osborne.
"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."
In the run up to the autumn statement, ministers have been announced a series of measures to help growth, including backing mortages for families buying new-build homes and a 400 million pound investment fund to help construction firms finance housing developments.
Osborne said the government had signed an agreement with large British pension funds, which would involve them investing in infrastructure such as roads and broadband networks.
Other measures announced in recent days include a 1 billion pound programme to find jobs and work experience for 400,000 unemployed young people, and a 600 million pound investment in specialist maths schools.
There has been less detail on the funding for these measures, with newspapers speculating that some welfare benefits will be frozen to pay for them.
Media reports over the weekend said Osborne would also raise the rate of a tax on bank balance sheets to maintain the 2.5 billion pounds of revenue it aims to collect each year.
(Editing by David Holmes)