Britain posts first July budget surplus in 15 years, outlook darker

By Andy Bruce and Paul Sandle LONDON (Reuters) - Britain unexpectedly posted its first budget surplus for any July since 2002 according to official data on Tuesday, welcome news for finance minister Philip Hammond in what still looks likely to be a difficult financial year for the government. The surplus in July stood at 184 million pounds, compared with last year's 308 million pound deficit, the Office for National Statistics said, citing figures that exclude state-controlled banks. The surplus was boosted by a 10.6-percent year-on-year rise in self-assessed income tax receipts from individuals in July, a month that often sees a spike in these returns. But the year as a whole looks less promising, as last year's vote to leave the European Union has pushed up inflation and related borrowing costs, and led to slower growth since the start of 2017. Total borrowing since the start of the financial year in April is 10 percent higher than at the same point in 2016, and in March official forecasters predicted public borrowing would rise to 2.9 percent of GDP in 2017/18. This would be the first major break in deficit reduction since the Conservatives came to power after the worst of the financial crisis in 2010, when the deficit stood at just under 10 percent. Last year borrowing fell to a 13-year low of 2.3 percent of GDP. While economists think Hammond is still on track to meet his borrowing targets for 2017/18, they warned that a weak economy could soon dent revenue streams like income tax. "We expect that a degree of cyclical decline will show through in the (public finances) data in the months to come, if as we expect, unemployment begins to creep up," said Philip Shaw, economist at Investec. SLOW START Britain's economy suffered its slowest start to the year since 2012, with households feeling the strain from rising prices caused in part by last year's vote to leave the European Union, and wage growth remains weak. Separate figures from the Confederation of British Industry showed British manufacturing expanded strongly this month, although official data has yet to suggest the sector will seriously compensate for a slowdown in consumer spending. Rising inflation will also continue to push up government debt interest costs, Shaw from Investec added. Britain's government has paid out 21.6 billion pounds in debt interest payments during the first four months of 2017/18 financial year, the largest total for any April-July period on record and up 23 percent on 2016/17. In July alone, debt interest payments totalled 4.9 billion pounds, up 18 percent on a year ago. About a third of Britain's stock of government bonds pay interest that is linked to inflation. Historically July has been a strong month for corporation tax receipts too, although this year they fell slightly compared with a year earlier. This reflected new methodology introduced in the current financial year that smoothes out corporation tax revenues over the year. Hammond has not committed to balance the budget until the middle of the next decade, giving him some flexibility to slow the current pace of deficit reduction if needed to support the economy as the country leaves the European Union. A finance ministry spokesman said July's figures showed that the government was making "good progress" towards its fiscal targets, but that public debt remained too high. (Editing by Andrew Heavens)