LONDON (Reuters) - The government will seek to bolster a faltering economy without compromising its austerity programme in an annual budget on Wednesday overshadowed by air strikes on Libya.
Chancellor George Osborne will have limited room for manoeuvre when he addresses a packed parliament, having introduced a raft of tax rises and spending cuts in the months since the coalition took power last May.
The government has front-loaded cuts as it seeks to virtually eliminate a record budget deficit by 2015.
Osborne plans to erase 81 billion pounds of spending over the coming four years — an average of 19 percent for each government department.
The independent Office for Budget Responsibility (OBR) forecasts the deficit will fall from 10 percent of national output in 2010/11 to 7.6 percent in the next financial year as the cuts really start to bite.
Prime Minister David Cameron has promised the “most pro-growth budget in a generation” while Osborne has talked of moving from “rescue to recovery” mode.
However, the economy shrank by 0.6 percent in the last three months of 2010. Latest consumer confidence surveys show that Britons are worried about rising inflation affecting basics like fuel and food and fearful about their job prospects.
The Labour Party, in power for 13 years until last May, warns that the government is cutting harder and faster than a fragile economy can bear, while unions plan a mass demonstration in London next week.
Osborne said on Sunday there would be no diluting of austerity measures which have gone a long way to convince investors that despite record debt, Britain is a very different proposition to the likes of Greece and Portugal.
“That would be a huge mistake for this country,” Osborne told BBC Television. “We would lose economic stability and we would be back in the mess of wondering what is going to happen tomorrow to Britain’s credit rating. It is not going to happen.”
However, he did say he would not be seeking further tax increases or spending cuts.
Sharp cuts for the defence budget have been thrown into sharp relief by Britain’s involvement in air operations over Libya.
Analysts say Britain’s military is capable of taking part in a swift campaign against Libya, but prolonged fighting could stretch its armed forces and raise pressure on Cameron to rethink deep cuts.
Stronger-than-expected tax revenues may see borrowing undershoot forecasts by several billion pounds and give Osborne some leeway if the independent OBR forecasts it will recur, and it is not cancelled out by a weaker growth outlook.
Osborne has dropped heavy hints that he will cancel an increase in fuel duty planned for April, bringing some limited relief to motorists and the haulage industry.
A government source said on Sunday that the budget would also scrap a planned inflation-linked increase on air passenger duty this year.
The Liberal Democrats, the junior members of the coalition, have signalled they expect to see further progress on exempting anyone earning less than 10,000 pounds from paying tax.
When it comes to growth, the government will be looking for eye-catching initiatives that don’t break the bank.
“He will probably come up with palliative measures like cutting red tape but he can’t run the risk of frightening the markets,” said Wolfango Piccoli, a political analyst with Eurasia Group.
The government has said it will spend 100 million pounds on creating enterprise zones, updating a policy pursued by the Conservatives in the 1980s with mixed results.
Some of the money raised from a levy on banks will be used to increase apprenticeships and work placements to try to cut rising youth unemployment. One in five of those aged 16-24 and seeking work are currently jobless.
Editing by Mike Peacock