Britain takes knife to 2015 public spending to tame deficit

By William James

LONDON (Reuters) - Britain's finance minister George Osborne will unveil on Wednesday his plans for another round of government spending cuts as he tries to keep his deficit-reduction drive on track and free up cash for fresh investment.

After weeks of tough negotiations that have strained relations among ministers trying to protect their turf, the Treasury clinched a deal at the weekend with hold-out departments.

That clears the way for Osborne to provide details in a parliamentary speech on where the axe will fall as he announces 11.5 billion pounds of spending cuts in the 2015/16 fiscal year.

Osborne has billed the spending round as part of his plan to move Britain "from rescue to recovery," although economists expect little or no impact on the trajectory of the country's finances.

"It is important to realise that this will not affect the overall spending envelope or the projected budget deficit at all," said Brian Hilliard, an economist at Societe Generale.

"Osborne's plan is to release some funds from the current spending budget so that he can increase infrastructure spending without deviating from his overall fiscal plan."

By promising to reinvest more than a quarter of the money saved, Osborne will seek to deprive the opposition Labour party of room to air their frequent criticism that cutting public finances aggressively has hindered economic recovery.

In recent months backing for Britain's austerity agenda has been damaged by the loss of its triple-A credit rating and calls from the International Monetary Fund to defer near-term cuts and increase infrastructure investment.

While spending on international aid, health and education has been protected, all other departments were asked to offer cuts of 8 to 10 percent of their budgets.

Despite cutting spending aggressively, weak economic growth and a costly welfare system have set back the government's original plans to wipe out by 2015 a budget deficit that stood at 11.2 percent of gross domestic product in 2009/10.

The latest official forecasts show that by 2017/18 Britain will still be spending more than it recoups in tax, to the tune of 2.3 percent of GDP.

Around 3 billion pounds of money saved is expected to be ploughed back into infrastructure spending, the Treasury said. Details of the government's capital spending plans will be announced on Thursday.

"We need quick and decisive action on the big decisions that will move projects from blueprints to building," said John Cridland of the Confederation of British Industry, which represents nearly a quarter of a million businesses.

The cuts to be announced on Wednesday will take effect as Britons go to the polls to elect a new government in 2015. The opposition Labour party has said it will stick to the government's lower day-to-day spending plans, but will invest more on infrastructure. (Editing by Hugh Lawson)