Chancellor George Osborne will set out his plan next week to revive a stagnant economy and avoid a double-dip recession in a growth package hamstrung by the euro zone debt crisis, tight public finances and a strict austerity drive.

Under acute pressure to do more to kickstart growth after a year of stagnation, he has little room for big handouts and may have to rely on cutting red tape and encouraging the private sector to spend more.

The 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.

It has dismissed opposition calls to relax its tough stance, saying a U-turn now would threaten Britain's triple-A credit rating and raise borrowing costs that are at record lows.

Employers are pressing the Conservative-led coalition to consider measures such as tax breaks, energy subsidies for heavy industry and a freeze in the national minimum wage.

Economists say Osborne's hands are tied and the euro zone's plight will have a greater impact on Britain's chances of avoiding a downturn than any policies announced in the annual budget and growth plan on Tuesday.

With no money to spend, he is going to struggle to boost demand significantly in the short term, said Vicky Redwood, an economist at Capital Economics.

Britain's growth since the end of the last recession in 2009 has been slower than any period since the aftermath of the Great Depression in the 1930s.

GDP grew by 0.5 percent in the three months to September, a figure flattered by a rebound from a weak second quarter. The government's fiscal watchdog is expected to slash its 2012 growth forecasts by more than half on Tuesday.

With finances so tight, Osborne is likely to focus on areas such as encouraging lending to small business -- something he has dubbed credit easing -- regulatory reform and support for housebuilders and infrastructure projects.

Osborne is in a very unenviable position, said Nomura economist Philip Rush. He is trying to deliver some kind of stimulus without having any of the resources at his disposal to do that.

Ultimately, we are going to be looking at things like the credit easing programme and softer supply-side measures to try and boost growth, rather than additional expenditure.


Cameron gave a flavour of the government's growth plan last week when he announced a public fund worth 400 million pounds to help builders restart stalled housing developments. It will also underwrite loans to around 100,000 buyers of new homes -- micro measures by any standard.

Osborne will give more details of a state-backed plan to help small- and medium-sized businesses borrow money.

The Bank of England last month expanded its quantitative easing programme of asset purchases by 75 billion pounds to 275 billion pounds to tackle a future inflation undershoot caused by weak growth.

This may improve access to credit for businesses big enough to issue traded shares and bonds, but the Bank has been reluctant to get involved in smoothing the flow of lending to smaller companies, saying this is primarily a job for banks and the government.

The centrepiece of Osborne's growth strategy is expected to be a programme to improve infrastructure in partnership with the private sector.

The government has given little indication of how much it will spend on infrastructure projects. Its unwillingness to borrow more means much of this money will need to come from the private sector, with media reports citing pension funds and insurance companies as possible sources.

The plan is likely to target new power stations, toll roads, railways, energy networks and Internet connections.

Other measures could include support for heavy industry in meeting higher energy costs, pension tax reforms and the easing of employment red-tape, according to media reports citing unnamed Treasury sources. One carrot for hard-pressed families might be the scrapping or delay of a planned fuel tax rise.

The British Chambers of Commerce, a business lobby group, said its members' biggest concern was the lack of access to credit to help them to grow.

If there's a lack of working capital it could choke off growth, choke off the recovery. That's our big worry, BCC Director General John Longworth told Reuters.

(Additional reporting by Fiona Shaikh; Editing by Catherine Evans)