April 24, 2012 / 10:08 AM / 5 years ago

Government scrapes below 2011/12 deficit goal

<p>Chancellor of the Exchequer George Osborne tours Google Inc's technology campus during the official opening in east London March 29, 2012.Chris Ratcliffe/Pool/</p>

LONDON (Reuters) - The government met its 2011/12 deficit reduction target by a whisker despite higher than expected borrowing in March, though the rise in total debt above 1 trillion pounds highlights the scale of the task ahead.

Eliminating the huge budget deficit created during the financial crisis is the central aim of the Conservative/Liberal Democrat coalition, which took power in 2010.

But this long-term target is looking increasingly hard to meet, with the economy close to tipping back into recession and governments across Europe teetering as a result of harsh austerity measures.

The Office for National Statistics said on Tuesday that the government's preferred measure, public sector net borrowing excluding financial sector interventions, fell to 8.30 percent of GDP in 2011/12 from 9.27 percent in 2010/11 - in line with forecasts from the independent Office for Budget Responsibility.

This was despite higher than expected borrowing in March of 18.174 billion pounds, the highest March reading in two years and well above economists' forecasts.

The fiscal-year total came in just below its 126 billion pound target at 125.974 billion pounds, but Britain's total debt burden rose to a record 1.0225 trillion pounds, equivalent to 66 percent of GDP.

"They are making gradual progress in reducing the deficit," said Ross Walker, an economist at Royal Bank of Scotland.

"It's going to get more difficult in subsequent years ... we haven't really had any significant current expenditure cuts."

The ONS said 'other current expenditure', which largely consists of departmental spending, fell for the first time since 1955 in the 2011/12 fiscal year, dropping to 388.4 billion pounds from 388.9 billion pounds.

There was little market reaction to the data. Investors have largely given Britain the benefit of the doubt on its deficit reduction programme, unlike many countries on the euro zone periphery.

Uncertain Outlook

But an uncertain growth outlook, as the euro zone debt crisis threatens Britain's biggest trading partner, could yet derail the government's attempts to reduce a deficit that exceeded 11 percent of GDP when it came to power.

Official data on Wednesday is expected to show the economy grew 0.1 percent in the first three months of this year after shrinking by 0.3 percent at the end of 2011, skirting the second quarter of contraction that would define a recession.

However, it will be a challenge for the economy to reach the meagre 0.8 percent growth target the government is banking on to reduce the deficit to 7.6 percent of GDP this fiscal year.

"If growth remains weaker ... then how much further progress will the government make in consolidating finances?" queried Tom Vosa, an economist at National Australia Bank.

Another key factor supporting demand for British government debt - Bank of England purchases of gilts under its quantitative easing programme - meanwhile looks set to fade as the BoE appears unlikely to sanction further stimulus next month.

Investors may draw some comfort from the fact that the UK Debt Management Office decided to cut gilt issuance in the fiscal year by 3.3 billion pounds to 164.4 billion pounds as a result of the on-track public finances data.

Reporting by Fiona Shaikh and David Milliken; Editing by Catherine Evans

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