Tax revenue pushes budget surplus to 2-year high - Reuters UK

By David Milliken and Olesya Dmitracova

LONDON | Tue Feb 22, 2011 2:43pm GMT

LONDON (Reuters) - Stronger tax revenues helped Britain to a bigger-than-expected budget surplus last month, raising the possibility the government might borrow less than planned in the 2010/11 fiscal year.

However, there is a strong chance Chancellor George Osborne will bank any savings rather than shower largesse in his March 23 budget, as economists expect it to be harder for him to meet the coming financial year's tougher borrowing targets.

"Borrowing is likely to undershoot the OBR's full-year forecast, but we'd be surprised if the Chancellor deviates from the current plan in his March Budget," said Andrew Goodwin, senior economic advisor to accountants Ernst & Young.

January is a key month for public finances, as it marks the payment deadline for a large chunk of the year's income and corporation tax.

Income tax receipts grew at their fastest year-on-year rate since 2005, helping the public sector net borrowing (PSNB) to show a surplus of 5.3 billion pounds -- its highest since January 2009 and well above the 0.7 billion economists had forecast.

The government's preferred measure of PSNB, which excludes financial sector interventions and forms the basis for official borrowing forecasts, showed a 3.7 billion pound surplus. This was the highest since July 2008 and up from a deficit of 1.3 billion pounds in January last year.

CUTTING THE DEFICIT

"These figures represent very good news for the chancellor," said Ernst & Young's Goodwin. "It looks very likely that borrowing will undershoot the full-year projection of 148.5 billion pounds, possibly by as much as 9 billion."

Goodwin said this gave Osborne scope to ease back on the fiscal tightening planned for 2011/12, which is twice as sharp as that which has taken place in the current year -- though he expected the programme to remain largely unaltered.

Reducing Britain's budget deficit was a key election theme for Osborne's Conservative Party in its successful 2010 election campaign, though the cuts planned by Osborne and his Liberal Democrat allies are viewed as excessive by Labour opponents.

British public borrowing totalled 156.4 billion pounds in 2009/10, equivalent to just over 11 percent of GDP and the highest deficit of any G20 economy. Tax rises and spending cuts in 2010/11 will only reduce this deficit to 10 percent of GDP -- far short of the 1 percent targeted for five years time.

Economists said the steeper spending cuts pencilled in for 2011/12 and beyond were likely to prove more challenging than the relatively modest fiscal tightening undertaken since the coalition took power.

"While the fiscal consolidation may have got off to a good start, we still think that the government will struggle to meet its fiscal targets next year, primarily reflecting the slowing of the recovery to a very sluggish pace," said Samuel Tombs of Capital Economics.

FUTURE BORROWING REVISIONS?

There are also reasons to suspect Britain has in fact borrowed more so far this year than Tuesday's figures from the Office for National Statistics show.