While the euro zone is fighting to contain an escalating debt crisis, low bond yields show Britain has retained the markets' trust thanks to the government's unswerving commitment to erase a budget deficit of more than 10 percent.

But Chancellor of the Exchequer George Osborne's proud proclamation that he has no "Plan B" could start to ring hollow if a sharper downturn hits tax returns and forces either more borrowing or even harsher spending cuts.

The stakes could not be higher and debate is heating up.

The storm over a phone hacking scandal and politicians' ties to Rupert Murdoch's media empire are buffeting Prime Minister David Cameron now but the government's chances of re-election in 2015 really hinge on its success in balancing the budget while keeping the economy moving.

International organizations like the IMF back Osborne's plan while at home, protesters have taken to the streets and the Labour opposition has demanded a rethink to boost the struggling economy, which may have shrunk in the second quarter.

"It wouldn't take a very big shock for his plans to go adrift. He has not a lot of money in the bank," said Carl Emmerson, deputy director at the Institute for Fiscal Studies think tank.

The government aims to balance the current budget — adjusted for cyclical swings — within five years while ensuring that the ratio of debt to GDP is falling by that time.

The Office for Budget Responsibility, an independent watchdog set up by the government, forecast in March that the austerity plan should turn the adjusted deficit into a surplus by 2015 and debt should peak at 70.9 percent of GDP in 2014.

The start to this fiscal year was disappointing.

Borrowing in the first two months was the highest on record. Analysts at Capital Economics said borrowing would exceed this year's planned 122 billion pounds ($195 billion) by nearly 30 billion should the trend continue.

A Reuters poll showed last week that economists expect only a overshoot of some 3 billion. A positive surprise is possible as tax revenue is based on nominal prices, which means inflation at more than 4 percent helps to fill the government's coffers. Income tax receipts may be stronger too as the economy added more jobs than expected since the recession ended in mid-2009.

But it remains an uphill struggle: The OBR's forecast of 1.7 percent growth this year and 2.5 percent and more from 2012 seems out of reach, putting deficit-cutting targets in doubt.

Vicky Redwood at Capital Economics said public borrowing could be close to 70 billion pounds — some 4 percent of GDP — in 2015/2016 and consultancy CEBR predicts the OBR forecast of 29 billion for that year will be overshot by 25 billion pounds.

There are any number of factors holding the economy back.

A goal of rebalancing from credit-fueled consumption and services to export-driven manufacturing and investment will be protracted, despite the Bank of England's support with record-low interest rates and a weak pound.

Banks are keeping credit tight for small companies as they repair their balance sheets and consumers are suffering the worst squeeze in income for 30 years on the back of soaring food and fuel prices, higher taxes and slow wage increases.

Abroad, an escalation of the crisis in the euro zone would spell further trouble for Britain with its large banking sector and close trade ties to the area.

Osborne called on Europe's leaders last week to act decisively, saying Britain was not immune even though markets view it as a safe haven for now as evidenced by the spread of 10-year gilts over German Bunds falling from over 1 percentage point at the time of the first Greek bailout in May 2010 to around 0.35 points.

The economy barely grew between October and March and there is the real prospect that it contracted from April through June.

Citigroup economist Michael Saunders sees GDP falling 0.2 percent in the second quarter and even with a decent rebound in the second half, growth will barely exceed 1 percent.

"For businesses that are depending on the domestic economy, this will be a recession year, even if overall GDP grows," he said.

Some economists have called on Osborne to slow fiscal tightening to prop up the fledgling recovery.

The chancellor has firmly rejected such calls, though he says his targets leave wiggle room should the economy take a turn for the worse.

Room for maneuver could be very limited as signs mount that the potential growth rate as well as the output gap — the difference between current output and output if the economy had continued to grow at its trend rate — have shrunk due to the long-term damage wrought since the 2007 credit crunch first bit.

If some businesses and sectors never recover, the economy may be unable to grow at rates previously thought plausible, meaning more of the deficit would be structural, i.e. that part of the deficit left even when the economy is operating at full capacity. That would require deeper cuts to tackle.

"The rule of thumb is: If you take 1 percent off potential GDP that will add about 0.7 percent to the structural deficit," IFS Deputy Director Emmerson said.

Citi's Saunders said the output gap may be just 1-2 percent this year compared to 3.9 percent estimated by the OBR while Nomura economist Philip Rush said the rate could be as low as 0.9 percent 2011 and 1.5 percent in 2012.

Surprisingly robust job creation may actually be a sign of lasting damage to the economy's ability to grow with companies hitting capacity constraints at lower growth rates, while the lack of investment during the crisis may have damaged the country's capital stock and the lack of company financing has limited innovation, Rush said.

Saunders said highly productive jobs in the financial sector may be replaced by jobs in manufacturing, with lower per capita value and Rush said shoppers' willingness only to pay bargain prices may hit the all-important retail sector.

The OBR itself flagged persistently weak growth and a lower-than-estimated output gap as main risks to the fiscal goals.

"If the output gap was roughly 1.5 percent of potential output smaller than our central estimate then the government would no longer be on course to balance the cyclically-adjusted current budget in five years' time," it said in March.

In the end, the risk to political reputation may be even more decisive for the government than market forces.

"Rather than the markets getting upset, it may look like the mandate that the chancellor has set himself will not be met and that's where the pressure to do more may come from," Emmerson said.