June public borrowing overshoots as economy weakens

LONDON (Reuters) - Britain's government borrowed more than expected in June as an economy in recession continued to weigh on public finances, raising doubts whether the government will meet its deficit reduction target for this year.

Britain's Conservative-Liberal Democrat coalition has committed to eliminating the structural budget deficit over the next five years, but earlier this week Prime Minister David Cameron said austerity may have to last until 2020.

The Office for National Statistics said public sector net borrowing excluding financial sector interventions -- the government's preferred measure -- rose last month to 14.447 billion pounds from 13.919 billion in June 2011.

This was above economists' average forecast in a Reuters poll for 13.4 billion pounds. Borrowing for the fiscal year as a whole is less than half of what it was last year, but this is almost wholly due to the figures being flattered by the transfer of the Royal Mail's pension assets to the government.

Stripping out this effect, the ONS said public sector net borrowing for the fiscal year to date had risen by 11.7 percent, compared with a decline of 4.6 percent forecast by the Office for Budget Responsibility for the fiscal year as a whole.

"It is still early days for the fiscal year, of course, but even with today's figures meeting the OBR's forecast for the fiscal year 2012-13 looks a bit more challenging," said Victoria Clarke, an economist at Investec.

"The economic backdrop is certainly weighing on receipts and perhaps to an extent making it more difficult to bring down those spending figures as well," she added.

The finance ministry said the public finances might not end up as far from the OBR forecast for 2011/12 as current year-to-date figures suggested, and the ONS noted that income tax receipts, for example, tend to come towards the end of the year.

"It is too early in the financial year to draw conclusions about the year as a whole. This is volatile data and is prone to revision: borrowing for last year has been revised again and is now estimated to be below the OBR's forecast," the finance ministry said.

Much of the current overshoot in borrowing was due to a smaller surplus in local government finances than last year, because of deferred or reduced central government grants, the ONS added.

MURKY PICTURE

While rising unemployment has driven up spending on benefits, earlier this month the Institute for Fiscal Studies think-tank said finance ministry figures showed government departments had spent 6.7 billion pounds less in the 2011/2012 fiscal year than planned under the austerity budget.

Britain's economy is mired in recession, however. A Reuters poll suggests GDP data next week will show a third consecutive quarter of contraction and the government faces growing calls to loosen the fiscal reins in order to support growth.

Chancellor George Osborne has so far focused on schemes to lower banks' funding costs to get credit flowing, as well as guarantees to support infrastructure investment without spending taxpayers' money directly.

But the International Monetary Fund said on Thursday the government might have to slow the pace of fiscal consolidation if growth failed to pick up.

Friday's data showed government receipts rose 3.6 percent on the year, while non-investment spending dropped 0.8 percent.

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 12.083 billion pounds in June from 11.073 billion pounds in June 2011.

Britain's total public sector net debt, excluding financial sector interventions, rose to 1.038 trillion pounds or a record 66.1 percent of GDP in June. Including the cost of bank support, it rose on the month to 144.5 percent of GDP.

The public sector net cash requirement plunged to 2.996 billion pounds in June 2012 from 10.689 billion pounds a year ago. This cash-based measure of borrowing tends to volatile, however.

(Editing by Catherine Evans)