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updated 1/27/2014 2:47:40 PM ET 2014-01-27T19:47:40

LONDON (Reuters) - Uncertainty over Britain's membership of the European Union is holding back economic recovery, a leading member of the junior partner in the coalition government said on Monday.

Major Market Indices

Liberal Democrat Business Secretary Vince Cable used a speech setting out his vision of Britain's economy to criticize Prime Minister David Cameron, a Conservative, for spooking investors by planning a referendum on EU membership.

"The prospect of a referendum and possible exit from the EU is deeply unsettling for businesses trading in the European single market, from the car industry to financial services," Cable told an audience of economists.

"The actual risks of leaving may be small, but one of the most useful contributions to recovery our coalition partners could make, in the national interest, would be to do more to remove this unnecessary risk."

Under pressure from eurosceptics in his party and with growing voter support for the anti-EU UK Independence Party, Cameron has promised to put Britain's future in the 28-country trading bloc to a public vote if he wins an election in 2015.

Multinational firms like Citigroup and Nissan have warned against Britain's withdrawing from the EU, while neither the Liberal Democrats nor the main opposition party, Labour, support such a referendum.

Cable also laid into Labour's plans to shake up the energy market, including a pledge to freeze prices if it wins the next election. He said the Labour proposal, announced last September, was "a recipe for killing investment".

Last week, the International Monetary Fund raised its growth forecast for Britain to 2.4 percent in 2014 from the 1.9 percent it had predicted in October - the biggest upgrade among the world's major economies.

But Cable stressed that Britain must avoid past mistakes by making sure the property market did not overheat. He said he was concerned about the effects of loose monetary policy on asset prices but stopped short of calling for a tightening.

"There is now so much distortion in the economy that a return to normal interest rates would be rather welcome ... But we are treading a fine line," he said, citing the negative impact an interest hike would have on indebted households and the value of sterling.

"The government has indicated it favors a postponement in monetary tightening," he added.

BATTLE LINES

With one eye on life after the end of the current coalition government, Cable also sought to sketch out how his party will differentiate itself.

Labour are currently leading in opinion polls with around 37 percent of the vote, 5 points ahead of the Conservatives. The Liberal Democrats have just 11 percent of voters' support, but could end up as king-makers if the May 2015 vote fails to produce a clear winner.

With all three main British political parties agreed on the need to eliminate a large public deficit and reduce the national debt, much of the election campaign is expected to be fought over each party's approach to doing so.

Cable said public spending could be allowed to stabilize or even grow in the next parliament while still reducing the debt burden - a sharp contrast to Conservatives who say 25 billion pounds of cuts are needed after 2015.

"Undoubtedly some on the Conservative side of the coalition see fiscal consolidation as a cover for an ideologically driven, 'small-state' agenda," Cable said.

"The Liberal Democrats will reduce the debt burden but ensure this isn't done at the expense of public services and the most vulnerable in society."

Liberal Democrat leader Nick Clegg said earlier this year that his party favored a mix of around 75 to 80 percent tax rises and 25 to 20 percent spending cuts to balance the books. The Conservative finance minister, George Osborne, plans to avoid tax increases and cut more deeply.

(Editing by Larry King)

(c) Copyright Thomson Reuters 2014. Check for restrictions at: http://about.reuters.com/fulllegal.asp

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