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

By Matt Falloon and Guy Faulconbridge

BIRMINGHAM, England, Oct 8 (Reuters) - Britain's Conservative-led government would cut an extra 10 billion pounds a year from its welfare budget and slash spending across the board in the next phase of austerity if re-elected, finance minister George Osborne 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 election, 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.

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.

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

Osborne, a close Cameron ally who was booed by crowds before he 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 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, but the government says softening its austerity plan would endanger Britain's recovery by putting its low borrowing costs at risk.

Osborne's March budget showed 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 the coalition's plan to deal with a record budget deficit in this parliament.

Investors say that Osborne will be forced to either cut spending more deeply or extend austerity well into the next parliament to honour his pledge to get Britain's deficit under control because of a return to recession this year.

Cutting more from the welfare budget would allow cuts at 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, who delivers economic and borrowing forecasts on Dec. 5, is expected to make a blunt assessment of the challenges facing Britain in Monday's speech and to say austerity should be borne in a fair way by all sections of society.

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

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