Rising deficit puts Britain at risk of debt goal miss

Pedestrians pass The Bank of England in the City of London February 14, 2012.

LONDON (Reuters) - Britain's budget deficit widened to the biggest on record for any August, data showed on Friday, a day after the central bank chief said missing its debt goal was acceptable for the government.

Public sector net borrowing excluding financial sector interventions rose to 14.410 billion pounds from 14.365 billion in August 2011 as Britain's recession hit company tax receipts and drove up benefit payments.

That was the highest for any August since records began in January 1993, although slightly below economists' forecast in a Reuters poll for 15.0 billion pounds.

Chancellor George Osborne, who has made reducing the deficit a central plank of his policies, may soon face a tough choice between cutting spending further or abandoning his goal of ensuring that the debt-to-GDP ratio starts falling by 2015.

The lack of growth and the rising debt pile have increased the tension within the coalition of Conservatives and Lib Dems, with some Conservatives urging more cuts to welfare.

The Labour opposition, meanwhile, is calling for a loosening of the austerity plan of tax hikes and spending cuts, aimed at erasing the structural budget deficit within five years and reducing the debt-to-GDP ratio.

Late on Thursday, Bank of England Governor Mervyn King - a firm supporter of the government's efforts to cut the budget gap - said missing the 2015 debt goal would be acceptable if the reason was weakness in the economy.

"We heard from Mervyn King last night they are going to bust the debt target," BNP economist David Tinsley said. "But that was always a stupid target anyway. I know it's difficult politically to break that but it is sensible economics. I think it's unavoidable."

The International Monetary Fund (IMF) predicted back in July that Britain's debt-to-GDP ratio will not fall by 2015. Nevertheless, the fund suggested the government ease back on austerity if the economy failed to recover by early 2013.

The fallout from the financial crisis left Britain with one of the biggest budget deficits of all major economies and its public sector net debt-to-GDP ratio has climbed to around 66 percent in August from some 36 percent before the crisis.

But the country has so far kept its top credit rating as the ratio is still lower than in countries like the United States.

And Britain's borrowing costs are still near record-lows, indicating the market's trust in the government's commitment to its fiscal plans.

TOUGH CHOICES

In March, the budget watchdog - the Office for Budget Responsibility - predicted a fall in the deficit to 5.8 percent of GDP in the 2012/13 fiscal year from around 8 percent in 2011/2012, but economists say that borrowing now looks set to overshoot forecasts by up to 30 billion.

Commenting on the August data, the OBR said the government's expenditure ran close to forecasts but tax receipts were lower. "There continues to be significant uncertainty around the prospects for full-year borrowing," it said.

Borrowing in the fiscal year to date fell to 31.003 billion pounds from 48.446 billion in the April-August period 2011.

However, stripping out a one-off transfer of Royal Mail pension assets, the gap stood at 59.0 billion pounds, up 21.8 percent compared with April-August 2011 - far above the OBR's forecast for the full year of an increase by just 0.5 percent.

In his annual Autumn Statement on December 5, Osborne is likely to face yet another downgrade in the OBR's economic growth forecast, as well as a gloomy outlook for the budget deficit.

"If the chancellor follows the (BoE) governor's lead - and we expect he will - then he will stick with the current fiscal plans ... but will not introduce extra fiscal tightening to correct the adverse effects on revenues of economic weakness," Citi economist Michael Saunders said.

But Osborne faces a rough ride.

His austerity drive has made him one of Britain's most unpopular politicians as the country is struggling to move out of recession and a meaningful recovery looks elusive despite the central bank's 375 billion pounds of stimulus bond purchases.

BoE policymaker Spencer Dale on Friday called the economic backdrop still "pretty challenging", but also noted encouraging signs that access to bank loans was becoming easier for firms due to the BoE's Funding for Lending Scheme.

The government had originally planned to eliminate the structural budget deficit by 2015 but a weak economy has forced it to extend austerity by another two years and Prime Minister David Cameron has warned it could even last until 2020.

Friday's data showed that government receipts rose 1.8 percent on the year in August, while current spending grew 2.5 percent. Within that, corporation tax inflows fell 2.1 percent on the year, while social benefit payments rose 4.9 percent.

(Additional reporting by David Milliken. Editing by Jeremy Gaunt.)