UK's Conservatives say to slash welfare in next austerity phase

By Matt Falloon and Guy Faulconbridge

BIRMINGHAM, England, Oct 8 (Reuters) - Britain'sConservative-led government would cut an extra 10 billion poundsa year from its welfare budget and slash spending across theboard in the next phase of austerity if re-elected, financeminister George Osborne will say on Monday.

The 2015 election is likely to be decided on the health ofthe economy, how fast the deficit should be tackled and whatareas of spending and taxation each party would focus on tobalance Britain's bloated public finances.

The Conservatives, who had bet growth would reduce thedeficit and help them win the next election, are struggling witha recession and a series of blunders which have put them about10 percentage points behind the Labour Party in opinion polls.

Osborne and Prime Minister David Cameron are trying to usetheir party's annual conference in the English city ofBirmingham to project an image of economic prudence.

They hope voters will welcome a further 10 billion pounds ofcuts in welfare spending - an area often portrayed in the mediaas rife with scroungers and waste.

"We are both satisfied that this is possible and we willwork together to find savings of this scale," Osborne said in anarticle with work and pensions minister Iain Duncan Smith forMonday's Daily Mail.

Osborne, a close Cameron ally who was booed by crowds beforehe presented medals to winners at the Paralympics last month,will make a speech at the conference on Monday.

The "social protection" budget, by far the biggest of alldepartmental spending, is estimated to come in at 207 billionpounds 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, butthe government says softening its austerity plan would endangerBritain's recovery by putting its low borrowing costs at risk.

Osborne's March budget showed he would have to cut borrowingby 49 billion pounds ($79 billion) in the two years followingthe 2015 election, after weak growth put paid to the coalition'splan to deal with a record budget deficit in this parliament.

Investors say that Osborne will be forced to either cutspending more deeply or extend austerity well into the nextparliament to honour his pledge to get Britain's deficit undercontrol because of a return to recession this year.

Cutting more from the welfare budget would allow cuts atother government departments to be held at a similar pace as isbeing enforced in current spending plans which run until the endof 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 forthe election battle.

Osborne, who delivers economic and borrowing forecasts onDec. 5, is expected to make a blunt assessment of the challengesfacing Britain in Monday's speech and to say austerity should beborne in a fair way by all sections of society.

However, he has dismissed calls by the Liberal Democratjunior coalition partners for a tax on expensive homes or afurther tax on the wealthy.($1 = 0.6176 British pounds)

(Writing by Matt Falloon and Guy Faulconbridge; Editing byRalph Gowling)