UK's Osborne to declare austerity push is paying off


* Osborne to present upgraded budget forecasts at 1115 GMT

* Government committed to deficit reduction

* Living standards lag behind strong rebound in growth

By David Milliken

LONDON, Dec 5 (Reuters) - British finance minister GeorgeOsborne is set to announce a turning point in his battle to fixthe country's public finances on Thursday, but falling livingstandards mean he cannot declare victory.

A sudden pickup in economic growth means Osborne's goal offixing Britain's finances is no longer out of reach and he isset to announce the first big fall in projected public borrowingsince the coalition took power in 2010 when he delivers ahalf-yearly update on the budget.

But with Britons due to go back to the polls in 17 months'time, he is also under pressure to help their personal finances.

The opposition Labour Party is campaigning on the idea of a"cost of living crisis" after several years of prices risingfaster than wages. Household disposable income is at its lowestlevel in a decade. Labour accuses Osborne of making the economicdownturn worse by insisting on big spending cuts.

Prime Minister David Cameron on Sunday announced plans tofund unpopular environmental levies on energy bills throughgeneral taxation, a response to Labour's calls for astate-imposed freeze in household fuel bills.

But on Wednesday, Cameron played down expectations of newtax cuts and stressed his government was determined to eliminatethe budget deficit.

"If the economy continues to grow and, as it were, the suncontinues to shine, we should be fixing the roof when the sun isshining, as the last government failed to do," he said in atelevision interview.

The outlook is certainly brighter than it was when thegovernment's Office for Budget Responsibility gave Osborne itsforecasts in March, at the time of his annual budget.

Then the OBR predicted growth of just 0.6 percent this yearand 1.8 percent for 2014. Those forecasts look set to be raisedsharply on Thursday. Last month, the Bank of England predictedgrowth of 1.6 percent in 2013 and 2.8 percent next year.

Shortly after Osborne begins speaking to parliament at 1115GMT, the Bank of England is expected to announce it is keepingits benchmark interest rate at a record low of 0.5 percent, evenas the recovery gathers pace.

The BoE has adopted a new policy, at Osborne's instigation,that aims to dissuade investors from expecting rates will riseuntil the recovery is much more established.


Strong growth has started to boost tax revenue andeconomists polled by Reuters expect borrowing to be revised downby about 10 billion pounds ($16 billion) in both 2013 and 2014.

A recent sale of government stakes in Lloyds Banking Group and Royal Mail will further reduce borrowingneeds, though they will not affect the main OBR deficit metric.

"There will be a sense of relief and improved confidencethat things are on the mend," said Brian Hilliard, chief UKeconomist at French bank Societe Generale.

Borrowing in the current financial year, which ends inMarch, is still likely to amount to nearly 7 percent of GDP.That is down from 11 percent when the coalition ousted Labour in2010 but still a big shortfall by international standards and areminder of how the British economy has failed to recover theground lost to the financial crisis.

Furthermore, the OBR is unlikely to bring forward the2016/17 date when it expects Britain to achieve a budget surplusbased on the measure long targeted by Osborne, which excludesinvestment spending and fluctuations in the business cycle.

Nonetheless, there are signs that credit ratings agenciesmay be re-evaluating Britain's prospects.

Standard & Poor's - the only one of the three major agenciesnot to strip Britain of its top-notch triple-A status earlierthis year - said on Wednesday that it could put its rating on amore stable footing if stronger-than-expected growth looked tohave become sustainable.

While the overall shape of Osborne's deficit-cutting plan iscertain not to change, there will be tweaks to tax and spending.

Ministries responsible for welfare, justice and businesswill have their spending cut by an extra 1 billion pounds a yearover the next three years, in part to allow lower businesstaxation and more investment, as well as free school meals formore children and a tax break for some married couples.

In a reflection of concerns about a price bubble in London'sproperty market, Osborne is expected to announce theintroduction of capital gains tax for foreigners who own aBritish property which is not their primary residence. There isalso a chance that landlords may no longer be able to claim taxrebates for mortgage interest.

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