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UK Budget: Chancellor to hold purse strings tight (and why)

George Osborne, the U.K.'s Chancellor of the Exchequer, is expected to keep his focus firmly on the austerity agenda in Wednesday's Budget.

Osborne will have one eye on next year's general election,expected in May, where his Conservative Party, currently the dominant partner in a coalition government with the Liberal Democrats, is hoping to win an outright majority.

(Read more: UK's Osborne promises budget of 'hard truths' to balanceeconomy)

Under his stewardship, the economy has begun growing by more than expected, and unemployment has fallen faster than forecast. The budget is expected to include improved figures on the U.K.'s fiscal deficit and debt profile, and more optimistic growth prospects.Unusually, not much of its contents have been leaked to media yet.

The U.K. government's treasury building in London, U.K.
Matthew Lloyd | Bloomberg | Getty Images
The U.K. government's treasury building in London, U.K.

Yet there is still little fiscal wriggle room for the kind of handouts that might win votes, and there is growing concern among economists that, rather than loosening fiscal constraints in the next few years, Osborne may have to tighten his belt further after the election – if he is re-elected.

(Read more: UK economy backon track -- but cracks remain)

"We suspect that the outlook for both monetary and fiscal policies is far more uncertain than the Budget and Minutes are likely to imply," economists at Citi warned.

"A major part of the U.K.'s planned fiscal tightening is scheduled for after the spring 2015 election, and subject to political risk as the election approaches – especially given Labour's persistent poll lead."

Some within Osborne's own party have put pressure on him to make more concessions towards the "squeezed middle": the middle classes who form a key slice of the Conservative vote. These could include raising the income threshold at which workers have to pay 40 percent tax. The Chancellor is more likely to help out those at the bottom of the income spectrum by raising the threshold at which workers have to pay tax. There could also be more incentives for exports, to help boost the U.K.'s exporting industries.

Ahead of the Budget, Osborne announced plans to extend Help to Buy, a scheme which loans money from the government to buy newly built homes, until 2020 – and to back building a new "garden city" in the south eastern country of Kent.

(Read more: Bubble alert? UK house prices rise to 6-year record)

Economists are still concerned that the scheme may be inflating a house price bubble. There are also persistent concerns about weak productivity figures, which suggest that wages are unlikely to start rising above inflation soon. While more jobs than expected have been added to the economy, they seem to be at the lower-paid end of the spectrum, and often on controversial "zero-hour contracts" where the employee is not guaranteed a certain number of shifts.

"The deficit is improving because of a cyclical rather than structural recovery," according to Rob Wood,chief UK economist at Berenberg. "The underlying fiscal position, which is what really matters, is not improving faster than expected."

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