Budget blow to Osborne as borrowing hits record

LONDON Wed Mar 21, 2012 11:19am GMT

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LONDON (Reuters) - The Budget deficit hit a record for the month in February as income tax receipts dived and spending climbed, in a blow to Chancellor George Osborne just hours before his annual budget on Wednesday.

The figures highlight how little leeway Osborne has to stimulate economy. With triple-A rating now under warning from credit ratings agencies, he must convince markets that he will stick to an ambitious deficit-reduction plan and resist calls to ease back on the pace of cuts.

Osborne has already warned that there won't be any giveaways in his budget statement at 12:30 p.m. Help for low-income families is likely to be offset by revenue-raising measures elsewhere, such as a new property sales tax on high value homes.

"This figure is completely out of the blue. It provides an uncomfortable background for the budget," said Philip Shaw, economist at Investec.

The Office for National Statistics said that public sector net borrowing excluding public sector interventions - the government's preferred measure - hit a record for the month of February. It jumped to 15.183 billion pounds last month to from 8.875 billion pounds in February 2011.

This was almost twice the average forecast in a Reuters poll of 8.0 billion pounds.

DEFICIT REDUCTION

Conservative and Liberal Democrat coalition government has made erasing the country's budget deficit - which was at a peak of 11 percent of GDP when they came to power in 2010 - a cornerstone of their economic policy.

Wednesday's data showed the government remains just about on track to undershoot its borrowing target of 127 billion pounds this fiscal year. Borrowing so far in 2011/12 came in at 109.957 billion pounds, down from 118.890 billion in 2010/11.

"The government is making progress in cutting the deficit this year," said a Treasury spokesman, adding that departmental spending was always expected to be higher at the end of the fiscal year.

And Osborne is expected to reveal later that government borrowing will fall below 100 billion pounds in the 2012/13 fiscal year for the first time since 2008/09, thanks to a one-off windfall of 28 billion pounds from a transfer of assets from the Royal Mail pension fund.

The ONS said February's jump in borrowing was driven by a 2.7 percent drop in tax receipts on the year, while government spending climbed 8 percent.

Income tax alone slumped 12.4 percent on the year in February, while benefit payments climbed 11.2 percent. The ONS said government departments tended to backload their spending, but that had been more marked in February than last year.

The broader public sector net borrowing measure -- which includes the cost of bailing out Britain's banks, as well as some revenues from the sector -- rose to 12.909 billion pounds in February, up from 6.066 billion pounds in February 2011.

Britain's total public sector net debt, excluding financial sector interventions, rose to 995 billion pounds or 63.1 percent of GDP in February, also a record for the month. Including the cost of bank support, it fell to 137.9 percent of GDP.

(Reporting by Fiona Shaikh and Peter Griffiths; Editing by Toby Chopra)

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