3 Min Read
(Updates with reaction from Office for Budget Responsibility and HM Treasury)
By David Milliken and Costas Pitas
LONDON, Dec 21 (Reuters) - Britain's budget gap narrowed last month, keeping finance minister Philip Hammond on track to meet his new, less ambitious deficit reduction goals, but the country's fiscal watchdog said future months would pose a tougher test.
Last month Hammond formally abandoned his predecessor George Osborne's goal to run a budget surplus by 2020, as the Office for Budget Responsibility pencilled in a big rise in borrowing and weaker growth after Britain's June vote to leave the European Union.
Official figures on Wednesday showed borrowing in the first eight months of the 2016/17 tax year fell by 11.5 percent compared with a year earlier - more than enough to meet Hammond's new goal to cut the full-year deficit by 10 percent to 68.2 billion pounds ($84.4 billion), or 3.5 percent of GDP.
But the OBR said this downward trend was unlikely to continue and predicted borrowing over the next four months would probably exceed levels seen a year earlier.
Borrowing over the next four months would only need to be around 500 million pounds higher for Hammond to overshoot the forecast the OBR made just a month ago - which is already nearly 13 billion pounds more than Osborne gave in March.
Weak growth in tax revenue has hampered government efforts to reduce Britain's large budget deficit this year, even before the economy has seen much impact from June's referendum.
The OBR expects this problem to deepen. A surge in corporation tax revenue in October was not expected to persist, and a one-off boost to property sales tax revenue in early 2016 would not be repeated.
Moreover, public spending was likely to rise due to greater investment commitments and the rising cost of servicing index-linked government bonds as inflation picked up, the OBR said.
Britain's finance ministry said there had been "significant progress" in reducing borrowing but it was still too high.
Public borrowing in November alone fell 4.4 percent to 12.6 billion pounds, the lowest for any November since 2007 but less of a drop than most economists had forecast in a Reuters poll.
In the longer term both the OBR and private-sector economists see greater headwinds to deficit reduction.
"The Brexit-related fiscal challenge has yet to really begin," Investec economist Chris Hare said.
The OBR forecasts growth will slow to 1.4 percent next year from 2.1 percent in 2016, dragging down growth in tax revenue and increasing spending on unemployment benefits.
In total the OBR expects the government to borrow 122 billion pounds more than planned over the next five years as Britain leaves the EU.
Last year's budget deficit was 4.0 percent of GDP - higher than in almost all big advanced economies - and Hammond still expects to run a deficit of 0.9 percent of GDP in 2021, in contrast to Osborne's goal of a surplus by 2020. ($1 = 0.8080 pounds) (Reporting by David Milliken)