Britain's deficit in surprise fall

The British government's public deficit surprisingly fell in May, according to official data, but the state remains on course to unveil huge spending cuts in tomorrow's (Tuesday's) emergency Budget.

The country had a public deficit of £16 billion (€19.2 billion) in May, according to new official data.

The public sector net borrowing requirement, the government's preferred measure of public finances, compared with a deficit of £17.4 billion in May 2009, the Office for National Statistics said in a statement.

Analysts had meanwhile forecast borrowing to shoot up to £19.5 billion last month, according to analysts polled by Dow Jones Newswires.

In addition, borrowing in April was revised sharply down to £8.3 billion, due to higher-than-expected taxation revenues.

The news come ahead of tomorrow's emergency budget from Chancellor of the Exchequer George Osborne, who is expected to unveil big spending cuts and tax hikes as the overall public deficit remains extremely high.

Britain's new fiscal watchdog the Office for Budget Responsibility this week forecast state borrowing to reach £155 billion in the year to March 2011.

Britain's public deficit had rocketed to a record-high of £156 billion in the 2009/10 fiscal year that ended in March.

"May's monthly public finance figures continue the recent run of slightly better-than-expected news on the fiscal position," said Capital Economics senior Britain economist Vicky Redwood.

"The big picture of course is that borrowing remains extremely high and additional measures to reduce the deficit will be required in next week's Budget.

"Indeed, the government appears keen to act sooner rather than later. We expect tax rises and spending cuts adding up to perhaps £20 billion per annum to be announced on Tuesday."

The government had announced plans last week to axe or suspend projects planned by the former Labour government that were set to have cost about £11.0 billion.

The coalition had already announced plans in May to cut spending by about £6.2 billion in 2010/11.

Investec economist Philip Shaw said that the better-than-expected May borrowing data would not prevent Osborne from delivering a tough austerity budget tomorrow.

"Does this detract from the case for a big fiscal tightening in the next budget? The answer is clearly no," Mr Shaw said. While recent data have been mildly encouraging, UK borrowing remains unsustainably high and a big squeeze in government spending, probably reinforced by tax increases, remains fully justified.