Business secretary says any pre-election giveaway would undermine credibility, but acknowledges there is some opportunity for modest tax cuts

Vince Cable has warned that George Osborne has no room in next Wednesday’s budget for a substantial pre-election giveaway, but acknowledged that there was some headroom in the public finances for modest tax cuts or an increase in public spending.

The Liberal Democrat business secretary indicated the chancellor had a sum estimated at £5bn – that could be used to increase the personal allowance tax threshold or to row back from plans to cut public spending back to the level of the 1930s in the next parliament.

In an interview with the Guardian a few days before the last major financial event of the coalition government, Cable said: “This budget, I think there is a common agreement across the coalition, cannot be some kind of pre-election bonanza because that would completely undermine credibility.”

He said that although the country’s fiscal position is a better since the chancellor delivered the autumn statement in December, there were “still quite serious tasks to be done in completing the process of reducing the structural deficit, and anyway, the public would see through some transparent budget with lots of rabbits appearing all over the place”.

It is expected that a combination of lower-than-expected inflation and better-than-anticipated tax receipts will have provided the Treasury with around £5bn to spare, giving Osborne some room for manoeuvre. Cable added: “I’m not expecting, and I don’t think anybody else is expecting some vast largesse.”

Cable also said that the Lib Dems had been closely involved with the setting of the budget, and that it would not be effectively hijacked by the Conservatives. He added: “We are insisting that it is a coalition budget. The process is in place to make sure that it is.”

The Lib Dems have been pressing for a further rise in the £10,000 a year personal tax allowance – the sum before which any income tax is paid – in an effort to press home his party’s ownership of the single biggest tax reform of the parliament. The allowance is already projected to rise to £10,600 from April.

Every £100 annual increase in the personal allowance costs £500m. The alternative will be to align national insurance with the personal tax allowance, a measure favoured in the past by Cable as doing more to help those on low pay.

Cable said Osborne’s alternative would be to shift towards a different fiscal target for the end of the parliament, such as reaching a balanced budget rather than an outright surplus.

This would at a stroke remove the suggestion contained in the Office of Budget Responsibility report on the autumn statement that Osborne was planning to take public spending as a proportion of GDP to its lowest level since the 1930s.

Ed Balls, the shadow chancellor, indicated on Thursday he expected Osborne to shift away from that position and to try to fend off the accusation of being ideologically extreme.

Cable said he hoped Osborne will shift his approach “because the original stuff was extremely alarming. I am not sure he has backed off it. I sincerely hope he has but the consequences are potentially quite horrific”.

Describing what he thought the impact would be, Cable said: “You are talking about mainstream government departments which have already made serious cuts which were dealt with as low-hanging fruit, being told they have to think about another round of cuts of 25, 40% or whatever.

“You have already seen the reaction about defence and the police service; local government which has somehow got to maintain social services, to keep people out of hospitals – these things are not achievable with the kind of public expenditure cuts that Osborne was talking about.”

Cable also called for tougher action against tax evasion saying he would like to see it made a criminal offence. Speaking hours after it emerged that French prosecutors had requested a criminal trial of HSBC’s Swiss division over tax avoidance allegations, he said: “The banks were systematically involved, certainly in the late part of the last decade, in helping their clients to avoid paying taxes in the UK, and that is when Alistair Darling came in with the code of conduct which regrettably few of the banks signed up to.

“They have now all signed up to it, but there is a question whether failure to observe that code of conduct should be subject to much tougher penalties.”

The business secretary added he would like to see the coalition act on non-dom tax status. He said: “The whole non-dom thing is a nonsense and it should have gone years ago.”