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UK June public finances show government slipping off target

Britain's Chancellor George Osborne delivers a speech at a China-Britain Business Council dinner in London June 17, 2014. REUTERS/Neil Hall/Files

By David Milliken and William Schomberg

LONDON (Reuters) - Britain's public finances showed a bigger than expected deficit in June, continuing a weak start to the tax year and leaving Chancellor George Osborne with a lot of catching up to do to meet his fiscal goals.

The government failed to reduce public borrowing during the first three months of the 2014/15 fiscal year, possibly limiting its ability to offer any tax cuts or other voter-friendly surprises ahead of a national election in May next year.

Deficit reduction is the central economic policy of the Conservative-led coalition, which came to power in May 2010 when Britain's budget deficit was 11 percent of annual economic output - one of the highest for a major economy.

The Office for National Statistics said on Tuesday that the public sector finances, excluding financial sector interventions, showed a deficit of 11.368 billion pounds in June.

That was up from 7.594 billion pounds in June 2013 and well above analyst forecasts of a deficit of 10.65 billion pounds in a Reuters poll.

Stripping out the effect of cash transfers from the Bank of England, the 2014/15 deficit to date was 36.1 billion pounds, 7.3 percent higher than at the same point a year ago.

Britain's government is aiming to get the deficit down to 5.5 percent of gross domestic product in the 2014/15 fiscal year, from 6.5 percent of GDP in 2013/14, which will require a near 10 percent reduction in borrowing in cash terms.

If the Conservatives are returned to power next May, Osborne has said he wants to wipe out the deficit altogether by early 2019.


ONE-OFF FACTORS

The ONS said on Tuesday that some factors meant that trends in borrowing in the first three months of the current tax year, which began in April, might not be representative of the year as a whole.

Income tax payments in the first three months of this tax year were 3.5 percent lower than a year before, when revenues were higher than usual due to tax changes and there were also receipts from a Swiss tax avoidance deal.

Payments of grants to local authorities also followed a different pattern this year, an ONS official said.

Sam Hill, an economist with RBC in London, said government spending and receipts were often volatile and officials would probably be hoping for a bigger than usual boost to income in July when revenues are often higher.

"Otherwise, at that point questions on the credibility of the target may just start to become slightly more frequent, even if they will remain far from deafening," Hill said.

So far business surveys and data point to robust economic growth for the first half of the year - which ought to bode well for tax revenues in the coming months - though there have been some recent signs of a slight slowdown.

British factory orders slowed more than expected in July and growth expectations also eased, according to the latest survey from the Confederation of British Industry on Tuesday.

In June alone, income tax was up more than 2 percent compared with the same month last year and some economists said they were confident the impact of the economic recovery would start to feed through into public finances soon.

"The economic backdrop is clearly favourable and this should support not only income tax inflows but the broader receipts base too," said Victoria Clarke at Investec in London.

British public sector net debt was 1.305 trillion pounds in June, equivalent to a record 77.3 percent of gross domestic product.



(Writing by William Schomberg; Editing by Catherine Evans)