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LONDON (Reuters) - Lower income and corporation tax receipts dragged Britain's public finances to a much smaller than usual seasonal surplus in January, but the government still looks on track to meet borrowing targets ahead of its annual budget.
Deficit reduction has been finance minister George Osborne's key policy since Britain's Conservative-led coalition came to power in May 2010 when Britain's budget deficit was one of the world's largest at 11 percent of economic output.
Osborne presents his spending plans for 2014-15 on March 19, and in a speech on Thursday said he planned to tackle "hard truths" about the unbalanced nature of the recovery to date, and that his programme for deficit reduction was far from complete.
Friday's official borrowing figures showed January's seasonal surplus was little more than half that expected by economists, with income tax and corporation tax receipts both more than 5 percent lower than the same month a year ago.
But strong performance previously means Osborne should still meet his borrowing target for the 2013-14 fiscal year - barring a sudden break from trend in the remaining two months, according to Britain's independent fiscal watchdog.
Other figures released by the Office for National Statistics on Friday showed an unexpectedly sharp fall in retail sales in January, which suffered their biggest monthly decline since April 2012 after a very strong December.
"The bottom line though is that the government appears to remain on track to meet the 2013-14 full year borrowing target of 111.2 billion pounds," said Sam Hill, senior UK economist at
Britain's Institute for Fiscal Studies also said the figures suggest borrowing for 2013-14 will end up close to, or perhaps very slightly below, the Office for Budget Responsibility's forecast.
Still, January's disappointing surplus means Osborne is unlikely to have much of a windfall to play with before national elections in May 2015.
Friday's figures are not the final word, however, and tax revenue expected in January may yet appear in February or future revised January figures, economists said.
The ONS cited anecdotal evidence from Britain's tax office that there were more late submissions of self-assessed tax returns than last year as one reason for the weakness.
"Although January is historically a surplus month, due to self-assessment tax return receipts, it was smaller than we expected," said Sam Hill, senior UK economist at RBC.
Britain's public finances, excluding financial sector interventions, showed a 4.718 billion pound surplus ($7.86 billion) in January, down from 6.035 billion pounds a year ago on a comparable basis - stripping out the effect of a transfer of debt interest from the Bank of England to the government.
Economists had forecast a surplus of 8.15 billion pounds, and January's outturn was the smallest surplus for the month since 2010.
British government bond futures fell to a session low shortly after the data, which follows an unexpected fall in inflation and rise in unemployment earlier in the week.
January is a key month for Britain's public finances, as a disproportionate share of annual income tax and corporation tax is due, causing the budget to usually run a significant surplus.
Despite the weak performance this January, Britain's strong economic recovery in 2013 means that figures for the tax year that started in April 2013 are rosier.
Stripping out the effect of cash transfers from Royal Mail and the Bank of England, the 2013-14 deficit to date was 90.7 billion pounds, 4.2 percent lower than at the same point in 2012-2013. Government forecasts from December aimed for it to be 3.1 percent lower over the 2013/14 tax year as a whole.
Retail sales data disappointed too on Friday, adding to a run of mixed economic data over the last week or two, although economists still expect Britain's strong recovery will sustain through this year.
The quantity of goods sold was 1.5 percent down on the month and just 4.3 percent up on the year - both weaker than expected. The ONS said weak supermarket sales were the main driver of the decline, and clothes sales dropped sharply too.
ING economist James Knightley played down the significance of the fall in retail sales, noting that it came after a strong December and might have been affected by very wet weather in January which kept shoppers away from stores.
"With consumer confidence on a strong upward path, employment rising and wage growth starting to show some hints of life, we look for the household sector to contribute strongly to GDP growth this year," he said.
($1 = 0.6003 British pounds)
Editing by John Stonestreet