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Britain to unveil budget as nation risks new recession

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(Globalpost/GlobalPost)

Britain's finance minister George Osborne unveils his latest tax and spending plans this week in an annual budget likely to stick firmly to the coalition government's austerity drive despite the country's economy coming close to another recession.

Chancellor of the Exchequer Osborne, whose Conservative party heads a coalition government with the Liberal Democrats, will present his 2013/14 budget to parliament at 1230 GMT on Wednesday.

Analysts expect Osborne to stick to his so-called Plan A of driving down a record budget deficit inherited from the previous Labour administration, despite calls from within and outside the government to curb massive spending cuts.

"Overall the chancellor faces the same precarious balancing act of proceeding with Plan A to consolidate the budget deficit, while at the same time devising measures to encourage the recovery," said Philip Shaw, an economist at Investec financial group.

"To all intents and purposes the overall fiscal stance looks set to remain unchanged, although Mr Osborne might find some room to launch some new infrastructure projects," he added.

Prime Minister David Cameron insisted earlier this month that his government, which passed the mid-term mark in January, would stick to the path of austerity despite a turbulent few weeks that saw Britain stripped of its top-level AAA credit rating.

The Conservative leader said that changing course on the economy would plunge Britain "back into the abyss."

The warning followed suggestions by Business Secretary Vince Cable that the government should consider borrowing more to stimulate economic growth.

Cable, a leading Liberal Democrat, wrote in an article that the danger of slow growth may now be more damaging than the loss of confidence through increased borrowing and that the "balance of risk" had changed since the coalition made deficit reduction the key plank of its policies.

Markets are meanwhile also waiting to see whether Osborne uses the budget to announce changes to the Bank of England's inflation target to boost an economy at risk of its third recession since the start of the global financial crisis five years ago.

"With the economy still stagnating, Mr Osborne is under more pressure than ever to pull something out of the bag at the budget on 20th March," said Vicky Redwood, an economist at Capital Economics research group.

"But we doubt that he will do anything very bold on the fiscal front. So the key question is whether he will make it any easier for monetary policy to support the recovery by altering the Bank of England’s remit."

The chancellor traditionally uses the budget to state the central bank's policy mandate, which for many years has been to meet an inflation target of 2.0 percent.

"In previous years this has been a mere legislative formality. This year could well bring revisions to the monetary policy mandate, to make more explicit the 'flexible' nature of the inflation-targeting regime," said Royal Bank of Scotland economist Ross Walker.

Incoming Bank of England governor Mark Carney, the Canadian central bank chief who takes up his role in July, has suggested that economic output might be a better target measure than inflation.

The BoE uses interest rates as a tool to try and keep inflation close to the government-set target, but in recent years it has spiked above 5.0 percent, hampering economic recovery.

British 12-month inflation stood at 2.7 percent in January for the fourth month in a row.

-- Moody's credit downgrade rocks Britain --

The government suffered a major embarrassment last month when Moody's ratings agency downgraded Britain's AAA credit assessment by one notch from AAA to Aa1, arguing that state debt was still mounting and growth was too weak to reverse the trend before 2016.

The opposition Labour party described the downgrade as a "humiliation" for the chancellor, who had made safeguarding the triple-A rating a key test of his policies.

The party meanwhile argued that the coalition was cutting too hard and too fast, thereby choking off the recovery.

Britain's economy stands on the brink of a so-called triple dip recession after gross domestic product (GDP) shrank 0.3 percent in the final three months of last year.

Another contraction in the current first quarter would place it in the third recession since the 2008 global financial crisis, something which business leaders are eager to avoid.

The Confederation of British Industry (CBI) -- Britain's biggest employers' body -- recently argued that Osborne needs to ramp up spending on infrastructure to generate badly-needed growth.

"The budget is a chance for the government to act creatively to encourage the growth we need. And what makes most sense for growth is a focus on infrastructure," said CBI Director-General John Cridland.

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http://www.globalpost.com/dispatch/news/afp/130317/britain-unveil-budget-nation-risks-new-recession