Chancellor George Osborne will have to defend his flagship austerity programme against a growing political storm on Tuesday, when new government forecasts look set to show little growth next year and a big overshoot in borrowing.

Osborne's autumn budget statement is expected to show independent growth forecasts halved for next year to a little over 1 percent, allowing the opposition to ram home charges that the government has been overzealous with its scything cutbacks.

There is no sign that Osborne or the Liberal-Conservative coalition are set to back down on the measures, a major reason why Britain has avoided a similar plight to the euro zone.

But the new numbers increase the risk that, under pressure from a collapsing euro zone economy, growth will remain weak for much of the cabinet's term and Osborne has scant room to come up with low-cost growth measures to change that.

There is public support for the austerity, as long as it is being seen to deliver in the medium term, said Tim Bale, professor of politics at the University of Sussex.

(But) if it clearly doesn't seem to be delivering economic growth -- and we still have high debt and deficit levels -- then I think the government will be in trouble with the public.

The Office for Budget Responsibility, the body Osborne set up just over a year ago to produce economic forecasts free from ministerial interference, is expected to slash its March growth forecasts, and predict higher borrowing for the next five years.

Osborne will be left with a wafer-thin margin to meet the coalition's fiscal targets, which require a budget surplus for non-investment spending within five years, as well as a falling ratio of public debt as a share of GDP by 2015/16.

Backing off on the austerity, however, even slightly, would risk throwing the country back at the mercy of bond markets who have already downed three euro zone economies and now threaten Italy and Spain.

The Chancellor has zero room for manoeuvre, said Scotia Capital economist Alan Clarke.

Against a backdrop of the financial market turbulence ... market confidence in the credibility of the public finances is critical. We believe it would be suicide for the government to abandon its fiscal austerity plans at this stage.


The OBR is expected to cut its March forecasts - 1.7 percent growth in 2011 and 2.5 percent in 2012 - in half, bringing them more into line with Bank of England forecasts last week and private-sector analysts.

That mean that public sector net borrowing is likely to fall more slowly than the OBR forecast. Economists at Barclays Capital forecast it will drop to around 126 billion pounds in 2011/12 rather than the 122 billion forecast, and then to 112 billion pounds in 2012/13, rather than 101 billion.

The 2011/12 forecasts would have been worse if it was not for the fact that it turned out the government borrowed nearly 10 billion pounds less in 2010/11 than the OBR assumed in March.

Likely downward revisions by the OBR to the amount of slack in Britain's economy, and its trend rate of growth, will hurt the fiscal outlook further out, even before any account is taken of risks such as a euro zone break-up or double-dip recession.

The knock-on effect of this is that the government's cyclically-adjusted current budget will only scrape into surplus by 2016/17 -- two years later than the OBR forecast in March, and right at the end of the five-year time limit.

With Britain's budget deficit totalling 9.3 percent of GDP in 2010/11, Osborne has little choice but to reassure markets he is staying the course.

Gilt market reaction is likely to be tempered by the prospect of the Bank of England remaining a large buyer of gilts over the short term, said Lloyds economist David Page.

However, further ahead the scale of supply adds to the risk premium. While we do not believe that these projections will result in a fundamental shift ... they clearly move closer to a potential tipping point, he added.


But concerns about Britain's standing with bond investors are unlikely to cut much ice with British voters who are facing the sharpest decline in living standards for 30 years, due to high inflation and stagnant wages.

Labour business spokesman Chuka Umunna told Reuters this week that spending cuts were fuelling a vicious circle of slower growth, and that markets would respect a change of course in response to an altered international backdrop.

To mute some of these criticisms, Osborne is likely to bring forward infrastructure programmes and try to channel private-sector funding into new projects through infrastructure bonds.

He will also reveal details of a so-far ill-defined credit easing scheme to boost the flow of lending to smaller businesses which was the highlight of his speech at the Conservative Party's annual conference in October.

Another possibility would be to scrap a planned 3-pence-a-litre rise in petrol prices, at a cost of about 1 billion pounds. Scotia's Clarke said this could be funded by linking the annual rise in state benefits to average inflation over the past six months, rather than the traditional September reading, which was a three-year high of 5.2 percent.

However, for many economists it will still be hard to ignore the darkening prospects for Britain's economy and finances.

The Chancellor will be keen for these growth measures to be the major take-away from the Autumn Statement, said Page. To our minds, it will be the further increase in the headline deficit projections that echo as the Chancellor sits down.

(Reporting by David Milliken)