Britain likely to miss deficit targets, but retail sales boom

LONDON (Reuters) - British Chancellor of Exchequer George Osborne looks likely to miss his borrowing goals for the 2015/16 tax year after recording a smaller-than-expected surplus in January, but booming retail sales augured better for Britain’s consumer-driven recovery.

British Finance Minister George Osborne looks on during a meeting with his Italian counterpart Pier Carlo Padoan (unseen) in Rome, Italy, February 3, 2016. REUTERS/Alessandro Bianchi

Before presenting a new budget plan on March 16, Osborne must weigh up robust domestic demand against a darkening global economic outlook that could yet exact a toll on Britain’s economic growth.

Friday’s official figures showed Britain’s headline budget surplus last month rose to 11.21 billion pounds ($16 billion) from 10.22 billion pounds a year ago, marking the biggest January surplus since 2008.

Still, it was some way short of the 12.65 billion pounds forecast in a Reuters poll of economists.

Deficit reduction has been the key economic policy of Osborne’s economic policy since he became finance minister in 2010, but progress in cutting the budget gap has been slow through most of the current financial year.

With central banks struggling to come up with new tools to stimulate a sputtering global economy, economic debate has focused increasingly on easing fiscal policy to boost growth - although there is no sign that will happen in Britain soon.

“Given the credibility the government has staked on reining in the public finances, it would take a pretty seismic event (in the global economy) to lead Osborne to tear up his rulebook,” Chris Hare, economist at Investec, said.

Friday’s retail figures temporarily boosted sterling, but in recent months it has weakened, in part reflecting concerns about the economy and receding prospects of a Bank of England interest rate hike.

January is usually a surplus month for public finances due to self-assessment tax return receipts.

Osborne has so far borrowed 66.5 billion pounds out of the 73.5 billion pound goal, with two months to go.

The last time government borrowing totalled less than 7 billion pounds in the final two months of the tax year was during 2003/04, said Samuel Tombs from Pantheon Macroeconomics.

Britain’s independent budget watchdog, the Office for Budget Responsibility, said there was “considerable uncertainty” about the prospects for government borrowing in the last two months of the financial year.

The debt-to-gross domestic product ratio fell to 82.8 percent in January, marking the first annual decrease since September 2002, based on provisional estimates of GDP.

While manufacturing and trade have dragged on Britain’s economic recovery, there has been scant sign that consumer spending - boosted by historic low levels of inflation - is running out of steam.

The ONS said retail sales volumes shot up 2.3 percent in January compared with December when they fell 1.4 percent, leaving them 5.2 percent up on the year. The figures were stronger than all forecasts in a Reuters poll.

“This strong retail sales number is a welcome upside surprise, indicating that domestic demand, at least, remains robust,” HSBC economist Elizabeth Martins said.

($1 = 0.6997 pounds)

Editing by Toby Chopra