Osborne seeks sweet spot between budget pain and electoral gain

By William James and David Milliken LONDON (Reuters) - British Chancellor George Osborne will try next week to convince voters only he can be trusted to run the economy, delivering an uncompromising fiscal plan in a budget update six months before national elections. Osborne will focus his Autumn Statement on Britain's return to growth, while sketching out enough sense of economic danger to dissuade the electorate from supporting his rivals. Backed by Prime Minister David Cameron, Osborne has staked the Conservative party's chances of winning the 2015 ballot on a gamble that voters will accept years more of spending cuts and reject the less severe fiscal consolidation offered by rivals. After a sharp slump triggered by the 2007/08 financial crisis and extended stagnation, Britain's $2.8 trillion (2.22 trillion pounds) economy is growing faster than any other major industrialised country and last year passed its pre-crisis peak. But despite five years of austerity in which the budget deficit has roughly halved, weaker than predicted growth over that period means the government is still borrowing more than 5 percent of economic output to pay for its spending. While Cameron recently said the world economy risked slipping back into crisis and Osborne points to the euro zone as a drag on the UK economy, the opposition Labour party says aggressive spending cuts after 2010 were partly responsible for a delayed recovery and persistently low tax revenues. Analysts expect Wednesday's independent forecasts to show a short-term pickup in projected growth, but a less certain outlook over the medium term and a deterioration in the overall fiscal position caused by weak tax receipts that will nudge borrowing higher. That will leave Osborne little room to loosen the purse strings. "We don't think it's going to be much of a good news event," said Melanie Baker, senior economist at Morgan Stanley. "It will refocus attention on the scale of deficit reduction that still needs to be done ... We're not expecting any significant net giveaways despite the pre-election timing." CAN YOU FEEL IT? Britons have been warned to expect spending cuts whoever wins the next election. It is a question of degree. Osborne plans to close the deficit gap by 2018/19 using spending cuts alone, without raising taxes. After that he wants to run a budget surplus in order to pay down national debt faster. Both the Liberal Democrats, junior partners in the coalition, and Labour - which holds a narrow opinion poll lead - have set out a less painful approach. Counterintuitively, a few signs of economic weakness could work in Osborne's favour. Polls show the Conservatives are more trusted on the economy than their rivals, allowing him to argue that anything other than his austerity plan is dangerously unsound. "I might have one or two difference with (Osborne) on economics, but as a politician, he's played a blinder ... he knows how to set this up very, very well," said Giles Wilkes an economist and former Liberal Democrat adviser. That could yet change. Osborne remains vulnerable to Labour's charge that people are not benefiting from the recovery, with wages and incomes rising more slowly than inflation. Economists are asking questions how feasible Osborne's plans are, particularly in light of 7 billion pounds worth of planned tax cuts announced earlier this year by Cameron. And then there are possible events beyond his control such as a return of the euro zone crisis which put paid to Osborne's 2010 plan eliminate the deficit by 2015. (Editing by Mike Peacock)