UK's Osborne to set out new spending purge, bets on voter support

By William Schomberg

LONDON, Nov 25 (Reuters) - British finance minister George Osborne will renew his push to fix the country's public finances on Wednesday, taking a gamble that voters will accept four more years of deep spending cuts.

Osborne, a contender to be Britain's next prime minister, is expected to tell parliament that he is still aiming for a budget surplus by the end of the decade, which could allow him to deliver income tax cuts, as promised, before the next election.

But the size of the projected surplus is likely to be revised down after one of his most controversial savings ideas -- big cuts to tax credits for low-earning households -- was blocked in a rare rebellion by Britain's upper house last month.

Seeking to show he is sensitive to the concerns of voters, he will announce more government support for home-building on Wednesday.

But Osborne has little choice but to stick with deep spending cuts in many areas of government in order to meet his surplus target.

The spending squeeze between now and 2020 represents the most aggressive austerity push by any rich economy, according to figures collected by the International Monetary Fund.

Osborne inherited a huge budget deficit in 2010 and he originally intended to have eliminated it by now. Instead, he has only managed to halve it. At nearly 5 percent of economic output in the last financial year, he says it still poses a real threat to Britain's economic security.

Osborne endured deep unpopularity because of his tough approach to spending until the economy picked up in 2013.

As in the first five years of his austerity push, he plans to protect Britain's health service, schools and foreign aid from cuts, and he plans to boost defence spending.

That means the cuts to be announced on Wednesday will be all the deeper for other, unprotected, areas such as policing.

The prospect of major job losses among police has alarmed some senior officers who are worried about how they would respond to a Paris-style attack in Britain.

Town halls are also bracing for more cuts which could affect services that many people rely on, such as rubbish collection and social care for the elderly and children, local government officials have warned.

Some unprotected government departments could see their budgets slashed by 50 percent over the decade to 2020.

At the same time, Osborne is expected to say he will water down the introduction of the tax credit cuts that provoked outrage when he first announced the idea in July.

Many economists say Osborne's insistence on a budget surplus had more to do with scoring political points over the Labour opposition party than economics.

Paul Johnson, head of the Institute for Fiscal Studies, a non-partisan think tank, said Osborne might eventually have to raise taxes to meet his surplus target, if economic growth slows only slightly more than expected in the coming years.

It (Other OTC: ITGL - news) remains to be seen if Osborne is able to stick to his spending purge -- he is off-course to meet his target for the current financial year -- and whether an impact on services could upset voters who as recently as May gave his Conservative Party a new parliamentary majority.

"The real question is whether they are able to continue squeezing the public sector in a way that improves efficiency or whether they have now cut to the bone and any further reductions in spending make a noticeable difference to services," Peter Kellner, president of polling firm YouGov (LSE: YOU.L - news) , said. (Additional reporting by William James; Editing by Raissa Kasolowsky)