Alexa,
It should be noted that the budget plan announced concerns a five-year timeframe. All the cuts and tax hikes will not occur immediately.
Apparently, given its references to Greece, the UK government believed that there was a sense of urgency to preempt market developments that might spark concerns about a debt crisis that, in turn, would require more and more austerity to try to fend it off. Market psychology can be extremely fickle. Markets can go to excess. They can become irrational. The UK's government evidently is worried about contagion associated with developments in some other debt-intolerant (unable to increase debt without significant adverse market reactions) countries.
Establishing and then maintaining market confidence is essential to avoiding such an outcome. The key to doing so is to meet or exceed deficit reduction targets so as to build and sustain the fiscal credibility necessary to insulate one's government against a dramatic turn in market sentiments. The kind of self-reinforcing feedback that the UK government seems to be worried about would entail the markets' reacting badly to the government's current fiscal path, which would push up interest rates making raising debt service costs for newly issued debt. In turn, the government would need to respond with tax hikes/spending reductions. Such a policy would impede growth in aggregate demand/perhaps weaken it. Impeded or reduced aggregate demand would undermine macroeconomic growth. Reduced economic growth (or a recession) would push down tax revenues/raise expenditures (at least the countercyclical portion of the budget). In turn, the deficit would be larger than anticipated and an additional adverse market reaction would result. The cycle would repeat itself over and over. As that happens, the government would begin to run out of programs that it could cut without the risk of grave political repercussions. The overall result would be recession/stagnation, persistently high unemployment, larger debt, reduced access to capital, and increased public pressure on the government to abandon its austerity program.
The UK government is hoping that the magnitude of fiscal sacrifice it announced will provide it with sufficient fiscal credibility in the immediate term. It probably should, unless indications that it cannot implement the policies emerge in coming days and weeks.
Afterward, the next milestone would be for the government to meet or exceed its deficit reduction targets. IMO, the government's estimating economic growth below the IMF forecast is not a bad thing. Often, economic growth is lower than anticipated during fiscal consolidation/austerity programs, so there is a chance that the overall budget numbers might be more accurate than if somewhat greater growth had been assumed. Needless to say, if the government misses its deficit reduction targets, that would be a problematic development.
On a brighter side, unlike Greece and the U.S., a much greater share of Britain's debt is of longer-term maturities. Hence, the risk of a near-term liquidity crisis remains fairly low, even as the magnitude of the overall debt challenge is substantial.