By William James

LONDON (Reuters) - British finance minister George Osborne unveiled a new round of spending cuts on Wednesday, but promised to pump some of the savings straight back into the economy to counter charges of excessive austerity.

In a speech to parliament interrupted by periodic jibes from opposition Labour party lawmakers, Osborne spelled out 11.5 billion pounds ($17.8 billion) in cuts for the 2015/16 fiscal year.

Local government budgets were among those hardest hit, while 3 billion pounds was earmarked for spending on affordable housing projects. Spending on international aid, health and education was protected.

The debate over the cuts, which will take effect just weeks before a general election, sketches out the economic battle lines for a campaign in which the health of the economy will be decisive.

"While recovery from such a deep recession can never be straightforward, Britain is moving out of intensive care - and from rescue to recovery," Osborne told parliament.

"We've always believed that the deficit mattered; that we need to take tough decisions to deal with our debts - and the opposition to that has collapsed into incoherence."

Earlier on Wednesday, Labour party leader Ed Miliband had criticized the need for further cuts, highlighting Osborne's 2010 pledge to eliminate the budget deficit by 2015.

The latest official forecasts show that by 2017/18 Britain will still be spending 2.3 percent of its gross economic product (GDP) more than it recoups in tax.

"What we see again today is the British people paying the price for this government's failure ... what we actually need is a fairer plan to get growth moving, living standards rising and the deficit down," he said.

But with Labour's economic credentials rated lower than those of the ruling Conservatives in opinion polls, Miliband's party has sought to repair its damaged credibility by pledging not to row back on the cuts if it won the 2015 election.


Despite cutting spending aggressively since coming to power in 2010, weak economic growth and a costly welfare system have set back the government's original plans to wipe out a budget deficit which it inherited at 11.2 percent of GDP.

Britain's austerity agenda has been challenged by the loss of its triple-A credit rating and calls from the International Monetary Fund to defer near-term cuts and increase infrastructure investment.

In an effort to stem mounting criticism that continued spending cuts were crimping economic growth, Osborne promised a total of 300 billion pounds of capital spending between now and the end of the decade, a third of which would be detailed in an announcement on Thursday.

"We need quick and decisive action on the big decisions that will move projects from blueprints to building," said John Cridland of the Confederation of British Industry, which represents nearly a quarter of a million businesses.

Labour said the boost to infrastructure wasn't enough and called for an extra 10 billion pounds of stimulus spending.

"If he took that action now, that might mean in two years' time we might not need these appalling cuts that he's penciling in," said Chris Leslie, a Labour economics spokesman.

Paul Johnson, director of the Institute for Fiscal Studies, said the scale of the cuts was astonishing and may ultimately push the next government to find other ways to cut the deficit.

"If I was a betting man I think there will be some kind of tax rise after the election," he said. ($1 = 0.6492 British pounds)

(Editing by Andrew Osborn and Hugh Lawson)