Hammond to give brighter outlook for UK's Brexit-bound economy

By William Schomberg

LONDON, March 13 (Reuters) - Britain's finance minister is expected to announce on Tuesday a modest improvement in the country's slow economic growth outlook in the run-up to Brexit, raising the prospect that he might relax his grip on public spending later this year.

But Philip Hammond will use a half-yearly update on the public finances to stress that his priority remains to ease the burden of Britain's 1.7 trillion pounds in public debt.

Britain has cut its annual borrowing from 10 percent of gross domestic product in 2010, when it was reeling from the global financial crisis, to around 2 percent now.

Encouraged by the fall in the deficit, some lawmakers in Hammond's Conservative Party have urged him to spend more on an over-stretched health system, the military and other services.

They want to check a rise in support for the opposition Labour Party which has promised to end the Conservative squeeze on public-sector pay and invest more in infrastructure.

Hammond has said he might be able to allow a bit more public spending later this year.

But he also says he must cut total public debt as a share of GDP, which stands at 84 percent, its highest since the 1960s, when Britain was still repaying World War Two debts.

He also wants to set money aside to help steer the economy through its exit from the European Union in March next year.

"There are still obviously lots of risks around," Paul Johnson, director of the Institute for Fiscal Studies, said.

"The thing that really matters over the next three or four years is not actually quite how fast the deficit comes down. It's how the economy reacts to Brexit and all the things around it," he told BBC radio on Monday.

Britain's economy has slowed sharply since the Brexit vote in June 2016, going from being the leader in the Group of Seven to being its worst performer last year.

The country's official budget forecasters are expected to say on Tuesday they are raising their projection for economic growth this year, after cutting it to 1.4 percent in November, at the time of the last budget statement.

Since then, the world economy has grown strongly, easing some of the Brexit drag on Britain.

Growth is also expected to be raised slightly in the following years, resulting in smaller budget deficits than thought in November although they are likely to be larger than the projections made before the Brexit vote.

Hammond has said he wants to wipe out Britain's budget deficit altogether by the mid-2020s. To do that, he faces some tough choices about cutting spending further spending or raising taxes, budget experts say.

The IFS think-tank said the government already plans further cuts of 16 percent to the justice ministry's budget over the next two years, at a time when British prisons have seen a rise in violence among inmates.

Hammond has said he will not announce any new tax or spending policies when he addresses parliament at 1230 GMT in a speech expected to last only around 20 minutes.

He has said he wants to make the November budget statement Britain's main fiscal event, giving up the chance seized by some previous British finance ministers of dominating the headlines with new policy announcements twice a year. (Editing by Larry King)