UK's Osborne seeking to swing election with final budget

* Osborne unveils final pre-election budget next week

* Election is most unpredictable in decades

* Minister wants Britons to feel economy improving

By William Schomberg

LONDON, March 9 (Reuters) - Britain's finance minister George Osborne has a chance to bolster the re-election prospects of Prime Minister David Cameron next week when he announces his last budget before a knife-edge election.

The election on May 7 is shaping up to be the most unpredictable in decades with anti-establishment parties gaining support and big differences between the Conservatives and the main opposition Labour Party on how to run the world's sixth-biggest economy and its membership of the European Union.

With the main political parties neck-and-neck in opinion polls, Osborne wants to use his high-profile statement on tax and spending on March 18 to try to make Britons feel that they are benefiting from the economy's turnaround.

The man who epitomises the drive to fix Britain's public finances since 2010 is likely to announce some rare good news on the country's still large budget deficit, giving him some room for manoeuvre.

Record (LSE: REC.L - news) low inflation, pushed down by the plunge in global oil prices, will give the government an estimated 3 billion-pound windfall in savings in inflation-linked bond payments in the 2015/16 financial year, as well as some lower welfare outlays.

"It's a positive for Osborne because of the lower spending and that does mean there is potential for the budget to be a 'good news' event for the Conservatives," Sam Hill, an economist with RBC Capital Markets, said.

"With the opinion polls pointing to stalemate, it will be interesting if the budget gives an opportunity for the government to do something which moves the dial a bit."

Osborne has signalled he will not use the inflation savings to fund expensive gifts to voters, even if economists at Citi say he could probably afford an income tax cut worth 4.5 billion pounds and still remain on course for his latest targets.

Osborne told the Financial Times in an interview published last week that he would aim for a cost-neutral budget because Britain could not afford "some pre-election giveaway".

Instead, he is likely to look for more targeted ways of helping voters and may say that cuts in the next parliament will be less painful than under his previous plans, hoping to address the weariness among voters after five years of austerity so far.

The man who wants Osborne's job, Labour's Ed Balls, tried to keep voters focused on the prospect of more pain under the Conservatives, saying in a speech on Monday that their planned cuts are "the most extreme in post-war history and the most extreme internationally".

OSBORNE'S DILEMMA

Political analysts said in such a tight race, a sudden shift away from the government's long-term economic plan -- a phrase repeated in every speech and interview by Osborne as the election approaches -- would be risky for the Conservatives.

"If you spend five years saying the economy is in trouble and we need to stop spending public money, it could be a difficult sell on the doorstep," Peter Allen, a politics professor at London's Queen Mary University, said.

Furthermore, if Osborne touts the economy's recovery too much, voters may feel that austerity has done its job and turn to Labour and its less aggressive fix for the public finances.

Yet Osborne will want to announce some sweeteners to voters, including probably an increase in the threshold at which earners start to pay income tax.

The Sunday Times said the government hoped that would put as much as 200 pounds a year more in voters' pockets. Media have also said beer duty could be cut among other measures to help low earners, many of whom have yet to recover their living standards at the time of the last election.

Labour is watching to see if Osborne will copy its plans to reduce tax breaks for private pensions -- which mostly help the better off -- to free up money to help lower-earning households.

Osborne and Cameron, who hail from rich families, are sensitive to claims that they favour the wealthy. Yet they have a strong lead over Labour on economic competence, polls show.

Britain's economy ended 2014 about 3 percent bigger than it was before the financial crisis after a year of strong growth and sliding unemployment. However, many other rich economies recovered earlier and more substantially.

Osborne hopes that signs of a strong start to 2015 for Britain's economy may give more momentum to the Conservatives' election campaign. He is likely to use his budget speech to intensify his attacks on Labour's handling of the economy before the financial crisis, when it was in power.

He is also expected to announce help for Britain's oil and gas industry after the plunge in oil prices and more details of a new tax on multinational companies judged to have shifted profits overseas to avoid tax. (Writing by William Schomberg; Editing by Giles Elgood)