April 23, 2014 / 1:41 PM / 3 years ago

UPDATE 1-Britain's budget gap narrowest since financial crisis

* Budget deficit falls to 6.6 pct of GDP, lowest since 07/08

* Economists eye pre-election "war chest" for Osborne

* BoE minutes show policymakers divided over job market

* CBI reports brightest outlook for factories in 40 years (Wraps in BoE minutes and CBI industrial orders)

By David Milliken and William Schomberg

LONDON, April 23 (Reuters) - Britain's hefty budget deficit has fallen to its lowest since the financial crisis, official data showed on Wednesday, helping the government argue it is delivering on a key economic pledge a year before a national election.

The Bank of England, meanwhile, indicated it was not hurrying to raise interest rates, even if its members are somewhat divided about the economic outlook.

The deficit in the 2013-14 tax year fell to 6.6 percent of gross domestic product from 7.4 percent in 2012-13 - in line with recent government plans.

It was the smallest shortfall since 2007-08, though well above that of most other advanced economies - including the 3 percent expected of European Union countries - partly a reflection of how much the government used to rely on massive revenues from banking and housing before the financial crisis.

Britain's Conservative-led coalition came to power in 2010 with a pledge to largely eliminate the deficit that then stood at 11 percent of GDP. Weak growth since then means finance minister George Osborne is now three years behind on this goal.

However, the economy is starting to turn around. Bank of England staff revised up their growth forecast on Wednesday, predicting 1 percent growth in the first three months of 2014 and almost as strong again between April and June.

This is almost double the economy's long-run average growth rate of 0.5-0.6 percent a quarter, and economists said Osborne might now have scope to loosen the purse-strings slightly before the May 2015 election.

"With the economy gaining momentum and employment and wages responding, there is likely to be better news on tax revenues through the fiscal year, which could provide the Chancellor with something of a war chest," said ING economist James Knightley.

The Conservatives trail the opposition Labour Party in the polls by a few percentage points. But any giveaways are likely to be small as Osborne has built his reputation around fiscal prudence. He is targeting a 5.5 percent deficit for 2014-15.

In cash terms, borrowing in 2013-14 totalled 107.7 billion pounds ($181.2 billion), 6.5 percent lower than a year earlier, after March's borrowing came in below forecast at 6.7 billion pounds.

Tax receipts are up 3.2 percent on the year, helped by a 4.5 percent increase in sales tax revenues and a 34 percent jump in property transaction taxes. Government non-investment spending rose just 1.4 percent, well below the rate of inflation.

Public sector net debt stood at 1.27 trillion pounds in March, equivalent to 75.8 percent of GDP. The OBR has forecast that ratio will peak at nearly 79 percent in 2015/16.

MINUTES

Minutes from the Bank of England's April 9 policy meeting showed that policymakers were in no rush to dampen the mood by raising interest rates from their record-low 0.5 percent.

The economy remains smaller than before the crisis, inflation is below target at 1.6 percent and wages are only just starting to catch up with prices after years real-terms falls.

There was little move in sterling or British government bond prices after the BoE minutes, which largely confirmed expectations that rates are likely to rise in just under a year.

The BoE has said it will only raise rates when the amount of slack in the economy has fallen materially, and April's minutes did not suggest this was imminent.

April's minutes reported "considerable uncertainty" among policymakers on how much slack there was, and some disagreement about the inflation outlook.

The BoE's April meeting came before last week's publication of data showing a sharp in the unemployment rate to below 7 percent, and next month's minutes are likely to be more revealing, as they will follow a quarterly BoE forecast update.

One challenge was judging whether a big rise in self-employment since the financial crisis represented an extension of pre-crisis trends, or was merely disguised unemployment.

Other data out on Wednesday suggested that for manufacturers at least, business boomed over the past three months.

The Confederation of British Industry's quarterly survey showed the sharpest rise in orders since April 1995, and biggest improvement in manufacturers' outlook since 1973. ($1 = 0.5944 British Pounds) (Additional reporting by Andy Bruce Editing by Jeremy Gaunt)

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