British finance minister George Osborne will pave the way for several more years of deep government spending cuts, when he reveals forecasts for much weaker growth and a borrowing overshoot of 86 billion pounds over the coming years.
Osborne's autumn budget statement at 1230 GMT is expected to show independent growth forecasts have been slashed for the next couple of years, reflecting in part a rapid deterioration of the global economic outlook since the March budget.
The prospect of years of fiscal austerity will fuel anger among unions on the eve of a one-day strike by 2 million public sector workers over government spending cuts that will make them pay more and work longer for their pensions.
The Office for Budget Responsibility, the body Osborne set up just over a year ago to make forecasts free from ministerial interference, is expected to cut its March prediction of 1.7 percent growth in 2011 and 2.5 percent in 2012 by at least half, bringing them more into line with most private sector analysts.
That means public borrowing is likely to fall much more slowly than the OBR predicted 8 months ago.
People familiar with the OBR's forecasting process say it will fall to around 129 billion pounds ($200.5 billion) in 2011/12 rather than the 122 billion forecast previously, and 117 billion in 2012/13, rather than 101 billion.
Totted up over four years, that results in a borrowing overshoot of 86 billion pounds.
The Chancellor's fiscal targets further out now look unattainable under the current public spending and revenue plans, given likely extended weak economic activity, said Howard Archer, economist at IHS Global Insight.
The OECD rich nations' economic think-tank said on Monday that Britain will slip back into a modest recession early next year. It lowered its 2012 growth forecast to just 0.5 percent and urged the Bank of England to expand its money-printing program.
The higher borrowing forecasts will leave Osborne with a wafer-thin margin to meet the coalition government'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.
Likely downward revisions by the OBR to the amount of slack in Britain's economy, and its trend rate of growth, will mean 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.
Osborne will reiterate his commitment to eliminating the structural budget deficit - the part that is not the result of changes in the economic cycle - over a rolling five-year period, and argue that wavering from the path of austerity risks provoking the ire of the bond markets.
Despite fears that the country is being pushed back into recession, the government will not fundamentally change tack.
We have got a deficit reduction plan that has brought us record low interest rates, Osborne said. We are absolutely going to stick to that plan because that is what is helping Britain weather this international debt storm and is also helping us lay the foundations of a stronger economy.
LOW BORROWING COSTS
Britain has enjoyed record-low borrowing costs thanks to its perceived status as a safe-haven from the euro zone debt crisis, which helps alleviate the pressure on public finances.
The yield on ten-year gilts has been trading at 2.3 percent, well below the 3.8 percent average rate projected by the OBR in March, resulting in a total debt interest saving of 21.5 billion pounds up to 2015/16.
Nonetheless, the government is likely to have to ramp up gilt issuance this year and next, and some analysts caution that backing off from austerity would risk throwing Britain back on the mercy of bond markets who have already downed three euro zone economies and now threaten Italy and Spain.
Recognizing that he has little scope to alter Britain's short-term economic prospects, Osborne will on Tuesday focus on measures that will boost growth in the longer term, such as promoting lending to small businesses and encouraging private sector investment in infrastructure.
He plans to tap British pension funds to provide the bulk of up to 30 billion pounds of investment in building projects, while the government will underwrite 20 billion pounds of loans to smaller companies struggling for credit.
Osborne will also unveil smaller measure aimed at alleviating the squeeze on incomes being endured by Britons at a time of high inflation and muted wage growth.
He is likely to trim a planned 8 percent rise in regulated rail fares next year to 6 percent and freeze local property taxes for a second year running.
He will also double a program providing 15 hours of free childcare per week to disadvantaged young children, which a government source told Reuters on Monday would cost 650 million pounds over the next three years.
($1 = 0.6433 British pounds)
(Additional reporting by Keith Weir; Editing by Andrew Heavens)