Chancellor George Osborne looks set to divert attention from the country's limp economy with politically driven tax measures in Wednesday's budget, aiming to appease both parties in the ruling coalition and keep financial markets onside.

Osborne, mindful of the risk that heavily indebted Britain could lose its prized top-notch credit rating, says he will not soften an austerity package of spending cuts and tax hikes.

But in a move that would please his own party, he may remove a 50 percent income tax band for the highest earners. The Conservatives say that high a levy is a barrier to aspiration, while the Labour opposition say it is a fair way to spread the pain.

To please the Liberal Democrats, the junior coalition partner, Osborne is expected to raise the income tax threshold by more than previously announced to 9,000 pounds ($14,300), which may please some low and middle earners.

Government officials have also disclosed the introduction of a new 7 percent stamp duty rate on sales of property above 2 million pounds, along with an expected corporation tax cut by 2 pence to 24 pence in April.

The economy looks set to avoid another recession, and the overall mood among businesses is slowly improving after taking a severe knock from the euro zone crisis at the end of last year.

But growth is still little better than the turtle's pace predicted in November's Autumn Statement and borrowing is broadly in line with those forecasts, giving Osborne little chance of claiming victory in deficit reduction or recovery yet.

A Reuters poll on Tuesday found Osborne could struggle to meet his budget targets within the next five years but will cut Britain's debt burden and hold on to the triple-A credit rating.

It is probably a stretch to say that all's well, said Nomura's Philip Rush. Borrowing remains extremely high.

Osborne's November statement showed the Conservative-Liberal Democrat coalition's deficit plans were close to crumbling, adding two more years of austerity after the 2015 election and pointing to a much slower recovery than they expected when they took power in 2010.

Ratings agencies have warned Britain that it could be downgraded, with apparently only Osborne's unwavering determination to cut the deficit keeping them onside for now.


Government officials have been surprised with the benign response the Autumn Statement received. Osborne has since sought to focus attention on a more political debate over taxation.

With three years until the next parliamentary election, he has a chance now to push through Conservative-friendly ideas which could prove too risky closer to voting day.

His goal over the next three years is to set the stage for a Conservative majority, without isolating his Lib Dem colleagues.

The need for fiscal policy to meet the coalition parties' political aims is becoming increasingly important, because the political glue holding the coalition together is weakening, said Citi economist Michael Saunders.

The Lib Dems have effectively given Osborne the green light to remove the 50 percent income tax rate on high earners as long as more progress is made in lifting workers out of income tax altogether and some other means is found of getting the wealthy to pay their way.

Despite the politics, Osborne is also likely to face calls to do more to get the economy moving. His efforts so far, other than relying on the Bank of England to support demand through quantitative easing, have failed to really get going.

The government had hoped to woo 20 billion pounds of investment from pension funds for a wave of infrastructure projects that would put Britain, which is slipping down the list of global economic powerhouses, on a better footing.

Only 2 billion pounds have been sourced so far, and credit easing, a means of getting cheaper credit to small businesses, is also seen struggling to get off the ground.

Officials close to Osborne admit their strategy of sticking to an unprecedented austerity plan in the hope that the private sector will take up the slack and drive the economy forward is a high risk one that could cost them dearly at the 2015 election.

Their saving grace is an opposition which has failed to capitalise on the coalition's failings. Labour is likely to demand a softer approach to give the economy room to breathe, an argument that has failed to make headway with voters.

However, Labour is not alone. U.S. Treasury Secretary Timothy Geithner on Monday warned against getting caught in an austerity trap where more cuts are needed to keep deficit plans on track which only serve to strangle growth.

(Additional reporting by Jonathan Cable, Fiona Shaikh, and Rachelle Younglai in Washington; Editing by Hugh Lawson and Richard Pullin)