By David Milliken
LONDON, Nov 27 (Reuters) - For the first time since taking office in 2010, finance minister George Osborne will be able to present a more upbeat message about Britain's finances in a budget update next week.
An unexpectedly strong rebound in economic growth since his budget in March will also give Osborne some scope to address rising living costs, the key challenge to his Conservative-led government's re-election in May 2015.
Growth is set to be three times faster than predicted as recently as March, and economists expect official borrowing forecasts for this year and next to be lowered by just over 10 billion pounds ($16.2 billion) when Osborne presents his half-yearly update on Dec. 5.
However, even if borrowing this financial year does fall to the range of 105-110 billion pounds that economists expect, it will still amount to nearly 7 percent of annual economic output - down from 11 percent at the last election but more than in almost all other big economies.
Moreover, economists do not think the government's Office for Budget Responsibility will judge the improvement in growth to be durable enough for it to bring forward the date when it expects Britain to reach a key budget goal.
Osborne aimed in 2010 to bring the budget into surplus - excluding investment spending, and taking into account where the economy is in the business cycle - by 2014/15, but this is currently pencilled in for 2016/17.
'The drop in the deficit is really all the side-effect of stronger economic growth,' said Michael Saunders, chief UK economist at Citi, adding that it was too early to for the OBR to judge Britain's long-run prospects had improved.
The fall in borrowing is less marked than the upgrade to growth might suggest, in part because of the time-lag between improvements in growth and the public finances.
The opposition Labour Party and some economists argue Britain would have achieved strong growth far sooner if Osborne had cut spending by less in 2010 and 2011, putting it in a better position to reduce borrowing now.
Nonetheless, the better borrowing numbers so far this year mean Osborne does not have to fear a repeat of the ratings agency downgrades in February and April, which cost Britain the triple-A rating he had pledged to defend.
LIVING COST CRUNCH
It also means Osborne will have some spare cash to funnel towards British households, whose incomes have risen by less than inflation every year since the financial crisis and are now at their lowest in real terms in a decade.
Osborne is under pressure to remove levies to fund environmental measures from household energy bills - the rising cost of which has become a political flashpoint - and instead pay for them through general government spending.
'These energy surcharges raise peanuts but they are fantastically unpopular and also a highly regressive form of taxation,' said Citi's Saunders, adding that removing them would cost 1-2 billion pounds a year.
Britain's finance ministry has remained tight-lipped about any new budget measures but the government has already committed to providing free school meals for more children and tax breaks for some married couples, which will cost a combined 1.3 billion pounds, and also aims to freeze tax on motor fuel.
New taxes are likely for foreign property owners who have been blamed for pushing up housing costs, especially in London.
But economists still expect Osborne to bank the bulk of Britain's borrowing undershoot, possibly to allow him more largesse nearer to the 2015 election.
Osborne has also firmly stressed the need to lower the deficit.
($1 = 0.6178 British pounds)
(Editing by Jeremy Gaunt) Keywords: BRITAIN BORROWING
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