Eyeing UK's top job, Chancellor Osborne lays claim to political centre ground

By William James and William Schomberg LONDON (Reuters) - Chancellor of the Exchequer George Osborne said on Thursday he was creating a new centre ground in the country's politics with his plans to cut welfare and boost pay, burnishing his credentials to become the next prime minister. Osborne used his freedom as a close ally of Prime Minister David Cameron to announce an overhaul of Britain's tax and spending system on Wednesday in his first budget plan since the centre-right Conservative Party won elections in May. Osborne stole some ideas from the leaderless centre-left opposition Labour Party as he sought to consolidate the election win by framing the Conservatives as the party most in touch with what voters want. But analysts said the ambitious plan included risks for the 44 year-old. He is considered an increasingly strong candidate to succeed Cameron who has said he will stand down before the next national election in 2020. In the budget, Osborne announced sweeping cuts to the welfare system alongside surprise plans for a new, higher minimum wage. "What we’re saying to the country is we're going to spend less, but we’re going to live within our means. That is the new settlement, I think it’s the new centre of British politics," he told BBC radio on Thursday. "What we’re saying to businesses is, pay higher wages but you get lower taxes. What we’re saying to people is you get a bigger paycheck, but there will be a less generous benefit system." Labour, which has yet to choose a new leader after Ed Miliband's post-election resignation, welcomed the shift towards a higher minimum wage, which it promised during its failed campaign. But the party accused Osborne of seeking to promote his own ambitions at the expense of poorer families with his plan for steep benefit cuts. Britain's independent Institute for Fiscal Studies (IFS) underscored the size of the planned welfare savings, saying 13 million families stood to lose out from a freeze in working-age benefits, tax credits and housing allowance. "The key fact is that the increase in the minimum wage simply cannot provide full compensation for the majority of losses that will be experienced by tax credit recipients," IFS director Paul Johnson said. "That is just arithmetically impossible." But polling data consistently shows that many voters favour cutting welfare. Britain's biggest selling newspaper The Sun, which tends to support the Conservatives, ran a front-page headline on Thursday welcoming the: "The Well Fair State." Bookmakers William Hill shortened their odds on Osborne becoming the next Conservative leader to 3-1 on Wednesday, a big change from double-digit odds before the May election. Just three years ago, with Britain's economy stuck in the doldrums after the financial crisis, Osborne was so unpopular he was roundly booed by a crowd at the London 2012 Paralympics. Despite the turnaround in the economy and his standing, Osborne still faces big challenges to achieve his plan of wiping out Britain's budget deficit by the end of the decade. The country has struggled more than most other advanced economies to get productivity -- or output per worker -- growing strongly again after the financial crisis. Without increased productivity, which would allow wages to rise without pushing up inflation, Britain's recovery may prove short-lived. Johnson at the IFS said Osborne was taking a risk by ordering companies to increase pay for their workers without a clear sign of how Britain would manage to increase productivity. "Simply forcing wage increases by government fiat, by hiking the minimum wage, is more of a gamble," he said. Economists at Nomura said the risk of companies raising their prices or laying off staff would grow along with the planned increase in the new minimum wage between now and 2020. "At low levels, the negative effect might be too small to see, but as the minimum (wage) level rises, capturing more workers, the pain will inevitably increase," economists at the bank said a note. After setting out his vision of a new political centre ground, a failure to deliver the promised low-tax, high-wage economy would also dent Osborne's aspirations. "Are these positions popular? Yes. Does that mean a new centre ground has been established? Yes," said Joe Twyman, a director at polling firm YouGov. "The question is in 12 months time, will people turn around and say 'that welfare reform, that has actually been significant'." (Editing by Catherine Evans)