Austerity will remain the name of the game in Chancellor George Osborne's budget next week, with coalition partners jostling for tax measures to please their base but little money available to give the economy a meaningful boost.

Unlike previous statements, Osborne can present his 2012/2013 budget on Wednesday against a slightly more benign backdrop. The euro zone crisis has eased, the United States is recovering, and borrowing needs seem a bit lower than feared.

But while the worst gloom is lifting, a meagre recovery after the 2007/2009 financial crisis has left many Britons poorer and unemployment at a 16-year high, keeping the pressure on the government to find ways to galvanize the economy without spending more.

The Conservative and Liberal Democrat coalition has made it the cornerstone of its policy to eliminate the budget deficit, which topped 11 percent of GDP after bank bailouts and a deep recession in the wake of the global crisis.

After rating agencies Moody's and Fitch both warned that Britain was at risk of losing its cherished top credit rating in recent weeks, there is no prospect of the fiscal straightjacket being loosened.

That has left the coalition parties wrangling over how to reshuffle some of the burden of austerity to please core voters and parliamentarians.

The changes that are debated are very symbolic, they would not change Britain radically or forever, said Tony Travers, public finance expert at the London School of Economics.

Attention is focusing on last-minute talks about the politically-charged issue of the 50 percent top tax rate on incomes above 150,000 pounds, which is popular with the wider public but anathema to many Conservatives.

Not all Liberal Democrats, minority partners in the coalition, are opposed to scrapping the top rate but they want to prioritise raising the threshold at which income tax kicks in to help low-income earners, and would like to see a separate tax on the wealthy to pay for any tax cuts.

Junior partners they may be but Prime Minister David Cameron needs the LibDems onside to maintain his parliamentary majority. Travers said they were insistent on having policies to show for their place in government having been punished in the polls since a 2010 election.

The four top coalition ministers - Cameron, Clegg, Osborne and Liberal Democrat Treasury minister Danny Alexander - are not expected to finalise the policy measures until Monday.

This will give Britain's fiscal watchdog, the Office for Budget Responsibility, barely enough time to evaluate the impact of any measures on the public finances.


With elections not due until 2015, the government is banking on a return to steady economic growth over the next few years to convince voters its austerity measures were the right medicine.

But so far Britain's recovery has been sluggish. A contraction at the end of last year fuelled fears of a renewed recession, prompting the Bank of England to launch another round of quantitative easing asset purchases.

Business Secretary Vince Cable from the Liberal Democrats criticized a general lack of a vision for the economy in a recent letter to the Prime Minister which was leaked.

The opposition Labour Party, which was ousted in 2010 after 13 years in government, has long accused the coalition of cutting spending too fast and too far at a time when the economy needed help to get back to growth. Some economists agree.

But for once, Osborne may not face a weaker growth outlook after the OBR had to cut its predictions at most of his previous budgets and autumn statements.

2012 certainly looks as if will be a bit brighter and we would expect a firmer OBR forecast, said Investec economist Victoria Cadman.

In November, the OBR slashed its 2012 growth forecast to just 0.7 percent, forcing Osborne to extend his austerity plans with further spending cuts beyond the next election.

Even this has left him with only a wafer-thin margin to meet the coalition's fiscal targets, which requires it to eliminate the underlying budget deficit within five years, and to put public debt as a proportion of GDP on a downward trajectory.

Most economists expect net borrowing for 2011/2012 to come in several billion pounds below the OBR's November forecast of 127 billion pounds thanks to deeper than expected spending cuts.

Business groups have lobbied the government to take bolder steps to encourage firms to invest in Britain, such as shaking up planning restrictions, and cutting burdensome regulation.

But the plans Osborne set out in his plan for growth last autumn, including steps to increase lending to small firms and encouraging pension funds to invest in infrastructure, are likely to have only muted impact.

(Reporting by Sven Egenter, editing by Mike Peacock)