UPDATE 2-UK's Osborne to slash welfare after next election

* Conservatives seek to project image of economic prudence

* But deficit reduction plan far behind due to recession

* Conservatives lag opposition Labour party in opinion polls

(Recasts lead with Osborne speech)

By Matt Falloon and Guy Faulconbridge

BIRMINGHAM, England, Oct 8 (Reuters) - Britain's Conservative-led government will trim an extra 10 billion pounds ($16 billion) a year from its welfare budget and make cuts across the board in the next phase of austerity if re-elected, its finance minister said 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 stretched 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 points behind the Labour Party in opinion polls.

Chancellor of the Exchequer (finance minister) George Osborne and Prime Minister David Cameron want to use their party's annual conference in Birmingham to project an image of economic prudence and win back support.

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.

"How can we justify giving flats to young people who have never worked?" Osborne told party supporters before a large Union Jack-design backdrop at a party conference whose slogan is "Britain can deliver".

"We made a promise to the British people that we would repair our badly broken economy. We will finish the job we have started," said Osborne, a close Cameron ally who was booed by crowds at a Paralympics medal ceremony last month.

In the 35-minute speech, Osborne said the Conservatives must appeal to those who aspired to improve their lot in life and said it was a delusion to believe the public finances could be brought back on track by raiding the "wallets of the rich".

Britain's "social protection" budget, by far the biggest of all departmental spending, is estimated 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 accused the former Labour government of spending too much and said opposition leader Ed Miliband was thus partly responsible for Britain's economic woes: "Labour must never be trusted to run the country's finances ever again," he said.


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 before the election.

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 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 per cent of gross domestic product.

Investors say Osborne, who delivers revised economic and borrowing forecasts on Dec. 5, will be forced to either cut spending more deeply or extend austerity well after the next election to honour his pledge to tame the deficit.

Osborne has refused to say how far behind schedule his deficit reduction plan is but he rebuffed critics who say he should pump up demand with government spending.

"Our critics would gamble everything: our credibility, our financial stability, our low interest rates, the cost of our debt they would risk everything on the dubious idea that a few billion more of spending would dramatically improve the fortunes of the trillion-and-a-half pound British economy," he said.

Osborne said he would allow companies to offer shares in the business to new employees in return for giving up certain dismissal and redundancy rights. Workers would get tax breaks on share profits.

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.

But his plans may cause tension with the government's Liberal Democrat junior coalition partners: Osborne dismissed their calls for a "mansion tax" on expensive homes or a further tax on the wealthy.

"This party of home ownership will have no truck with it," Osborne said. "The great bulk of savings must come from cutting government spending - not increasing taxes." ($1 = 0.6176 British pounds)

(Additional reporting by Peter Griffiths; Writing by Matt Falloon and Guy Faulconbridge; Editing by Mark Heinrich and Giles Elgood)