UPDATE 2-UK's Osborne targets welfare for cuts in tough message to voters

* George Osborne seeks to regain initiative after Europesplit

* Osborne abolishes pension "death tax"

* Pledges cuts to welfare spending

* Tells voters: Conservative will fix the finances (Recasts, adds details)

By William James and William Schomberg

BIRMINGHAM, England, Sept 29 (Reuters) - British financeminister George Osborne spelled out plans for more spending cutson Monday, betting that voters will accept his tough approach tofixing the economy and give an election victory to hisConservative Party next year.

Osborne announced a two-year freeze on a wide range ofwelfare payments as he sought to regain the initiative followinga split within the party of Prime Minister David Cameron's overBritain's membership of the European Union.

Osborne's fortunes have turned around dramatically alongwith Britain's economy, which started a strong recovery in themiddle of last year.

In his speech on Monday, he sought to capitalise on thegovernment's higher ratings over the opposition Labour party oneconomic policy, even as Labour commands a small but stubbornoverall lead over the Conservatives in opinion polls.

"The economy may mean nothing for Labour but it meanseverything for the people of Britain," Osborne said as he mockedLabour leader Ed Miliband for failing to mention the budgetdeficit in his conference speech last week.

Sticking to his once-derided programme to curb spending andfix Britain's still large budget deficit, Osborne stressed thescale of austerity ahead.

He ruled out any tax increases but said he would clamp downon technology companies which "go to extraordinary lengths topay little or no tax here."

Labour hit back, saying the plan showed the Conservativeswere the party of a privileged few. "Labour will balance thebooks as soon as possible in the next parliament, but we will doso in a fairer way," Chris Leslie, a Labour lawmaker, said.

The left-leaning Labour party plans to eliminate the budgetdeficit, excluding investment spending, during the 2015-2020parliament, a less aggressive approach than Osborne who isaiming to kill the shortfall in absolute terms.

The Conservatives' partner in Britain's coalition governmentalso hit out at the plan to curb welfare payments.

"It speaks volumes about the priorities of the ConservativeParty that they see benefit cuts for the working age poor as acrowd-pleasing punch line for a conference speech," a seniorLiberal Democrat source said.

The defection of a Conservative lawmaker to the anti-EU UKIndependence Party (UKIP) over the weekend marred the start ofCameron's last conference before May's national election.Conservatives fear the rise in UKIP support could hurt them inthe poll, which is already expected to be a close race betweenthem and Labour.

"HUMBLED" BY SCALE OF BUDGET CHALLENGE

In a speech that is likely to form the Conservative'selection pitch, the 43-year-old finance minister claimed creditfor returning Britain's $2.8 trillion economy to growth.

"I don't stand here marvelling at how much we have done. Onthe contrary: I am humbled by how much we have to do," Osbornetold applauding party activists, in front of a slogan "Securinga Better Future".

On entering office in 2010 as part of a coalitiongovernment, Cameron and Osborne bet that if they could getBritain's economy growing again and reduce a record budgetdeficit, voters would feel richer by the time of the election.

While the economy has recovered, wages are rising at theslowest pace in more than a decade and public debt is forecastto peak at 79 percent of gross domestic product in 2015-16.

With the public accounts still deep in the red, Osborne haslittle room to offer major tax cuts ahead of the election.

In one sweetener, he said he would scrap before the electiona 55 percent tax levied on pension pots of savers when they die.

But his aides said the pain of new austerity measures wouldbe felt by households and eat into some of the help they havereceived from rising tax-free allowances from income tax.

Several welfare payments would be frozen for two years tosave more than 3 billion pounds a year and help fund 25 billionpounds of annual spending cuts to eliminate the deficit.

Osborne also said efforts to cut spending by governmentdepartments would run for an extra two years after the election,accounting for a 13 billion-pound savings. Around 9 billionpounds of welfare cuts have yet to be spelled out, somethingaides said would take place before May.

Andrew Hood, an economist with the Institute for FiscalStudies, a thinktank, said the planned welfare cuts looked likean effective way to reduce benefits spending, even if theyrepresented only a quarter of the total extra savings needed.

"If you want to reduce welfare spending, a freeze is a goodway to raise significant amounts of money by hitting largenumbers of people for relatively small amounts," he said.

Osborne's vow not to increase taxes as part of his austeritypush contrasts with Labour's plan to restore the top rate ofincome tax to 50 percent and raise new levies on expensive homesand tobacco companies. (Writing by William Schomberg and Guy Faulconbridge; Additionalreporting by Kate Holton, Kylie MacLellan and Simon Jessop inLondon; Editing by Catherine Evans and Sonya Hepinstall)