Britain braced for more austerity in budget

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Britain unveils an annual budget on Wednesday that is likely to build on the coalition government's deficit-slashing austerity strategy, while also seeking to grow a recession-threatened economy.

Finance minister George Osborne presents his 2012-2013 budget before parliament, one week after Fitch warned that Britain's gold-plated AAA credit rating was increasingly at risk as it placed the country on negative watch.

Although Britain is at risk of further recession amid anaemic economic growth at home, and debt troubles in key trading partner the eurozone, Chancellor of the Exchequer Osborne is expected to maintain a policy of huge cuts to state spending.

"The chancellor's resolve to stick to his austerity plans appears to be as strong as ever," said Vicky Redwood, an economist at Capital Economics research group, ahead of Wednesday's budget.

Fitch last week lowered Britain's long-term outlook to 'negative' from 'stable,' blaming the 'very limited fiscal space to absorb further adverse economic shock,' but confirmed its AAA credit rating due to the government's austerity policies.

The Treasury welcomed Fitch's assessment, despite the negative outlook. "This is a reminder of why it is essential Britain sticks to its plans to deal with its debts," a spokesman said.

"This is a just another warning to anyone who believes there can be deficit-financed giveaways in (the) budget."

Britain's Conservative-Liberal Democrat government, which won power in 2010, has since implemented huge public spending cuts and tax hikes to slash a record deficit inherited from the previous Labour administration.

The coalition is eager to preserve Britain's valuable AAA credit rating, that keeps state borrowing costs low, and avoid a Greek-style sovereign debt crisis.

Ahead of Wednesday's budget, British media reported that Osborne would use fresh austerity measures to offset a plan to cut income tax for the highest earners -- from 50 per cent to 40 per cent.

Osborne, presenting his third budget, reportedly faces fierce pressure from the right wing of his Conservative Party and business leaders to slash the top rate -- to help stimulate growth and boost Britain's faltering recovery.

Treasury sources have meanwhile confirmed that Osborne would launch plans in the budget to issue state bonds, or gilts, lasting 100 years or longer, as the government seeks to lock in historically low interest rates.

"The chancellor's room for manoeuvre in the budget is negligible," said Barclays Capital analyst Chris Crowe.

"We therefore expect nothing more than a modest rearrangement of the fiscal furniture: this is likely to be a budget of small numbers," he added.

Britain's economy shrank 0.2 per cent in the fourth quarter of last year compared with the third, recent official data showed, putting the country close to a return to recession.

A further contraction in the first quarter of 2012 would place Britain back in recession, defined as two successive negative quarters. First quarter data is due next month.