By Matt Falloon and Guy Faulconbridge
BIRMINGHAM (Reuters) - Britain's Conservative-led government will trim an extra 10 billion pounds ($16.2 billion) a year from its welfare budget and cut across the board in the next phase of austerity if re-elected, its finance minister will say on Monday.
The 2015 election is likely to be decided on the health of the economy, how fast the deficit should be tackled and what areas of spending and taxation each party would focus on to balance Britain's bloated public finances.
The Conservatives, who had bet growth would reduce the deficit and help them win the next vote, are struggling with a recession and a series of blunders which have put them about 10 percentage points behind the Labour Party in opinion polls.
Chancellor of the Exchequer (finance minister) George Osborne and Prime Minister David Cameron are trying to use their party's annual conference in the English city of Birmingham to project an image of economic prudence.
They hope voters will welcome a further 10 billion pounds of cuts in welfare spending - an area often portrayed in the media as rife with scroungers and waste.
"People ... are angry at the fact that some of their taxes are going to support those who enjoy a lifestyle on benefits, which frankly they wouldn't be able to enjoy if they were in work," Osborne told the BBC before his speech to the conference.
Osborne, a close Cameron ally who was booed by crowds before he presented medals to winners at the Paralympics last month, said in an article with work and pensions minister Iain Duncan Smith that they would work together to find the savings.
Britain's "social protection" budget, by far the biggest of all departmental spending, is estimated to come in at 207 billion pounds in 2012/13 - almost a third of total spending.
Labour, which wants to see more taxes on banks and the rich, says Osborne has cut spending too quickly and choked demand. The government says softening its austerity plan would endanger Britain's recovery by putting its low borrowing costs at risk.
Osborne's March budget forecast he would have to cut borrowing by 49 billion pounds ($79 billion) in the two years following the 2015 election, after weak growth put paid to his plan to deal with the record budget deficit in this parliament.
Osborne has staked his reputation on preserving Britain's AAA sovereign credit rating and a 375 billion pound central bank-funded bond-buying project has reduced the cost of UK government borrowing to record lows.
But the underlying budget deficit has risen by a fifth so far this year compared to the same period last year and public sector debt rose to over 1 trillion pounds ($1.62 trillion) at the end of August - 66.1 per cent of gross domestic product.
Investors say Osborne, who delivers revised economic and borrowing forecasts on December 5, will be forced to either cut spending more deeply or extend austerity well into the next parliament to honor his pledge to tame the deficit.
Osborne refused to say how far behind schedule his deficit reduction plan was but when asked about austerity, said: "I'm afraid it is going to go on for some years ahead."
"The real test with any of these plans is that the rest of the world lends you money. We have very, very low interest rates at the moment, which proves that the rest of the world has confidence in those plans."
Shaving more off the welfare budget would allow cuts in other government departments to be held at a similar pace as is being enforced in current spending plans which run until the end of the 2014/15 fiscal year, according to Treasury calculations.
The government's next spending review, expected before 2015, will cover much of the 2015-2020 parliament and set the tone for the election battle.
Osborne will make a blunt assessment of the challenges facing Britain in Monday's speech and portray Labour leader Ed Miliband as a profligate spender whose role in the last government makes him responsible for Britain's economic woes.
But his plans may stoke tension with the government's Liberal Democrat junior coalition partners: Osborne has dismissed their calls for a "mansion tax" on expensive homes or a further tax on the wealthy. ($1 = 0.6176 British pounds)
(Additional reporting by Peter Griffiths; Writing by Matt Falloon and Guy Faulconbridge; Editing by Mark Heinrich)
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