Britain looks set to beat its own deficit-cutting target this year as local spending cuts helped the government to post the largest budget surplus in four years in January, safeguarding the country's top-notch credit rating.
The figures will provide relief to Chancellor George Osborne after Moody's warned last week that Britain could lose its triple-A rating if anaemic growth undermined its tough austerity programme.
Tuesday's data fuelled calls for Osborne to ease back on austerity. The Labour party as well as some politicians within the coalition government have called for tax cuts to boost growth - but analysts said big giveaways in next month's budget were unlikely as the road ahead remained tough.
We view this as a small victory in a long and drawn-out battle to keep the debt burden manageable, said Blerina Uruci, economist at Barclays Capital.
The Office for National Statistics said the public sector made a net repayment excluding financial interventions of 7.750 billion pounds in January, up from 5.204 billion pounds a year ago. This was the highest for any month since January 2008 and took borrowing in the fiscal year to date to 93.45 billion pounds, down almost 16 billion pounds on the year.
The figures suggest that government borrowing is likely to come in well below a planned 127 billion pounds in 2011/12, or 8.4 percent of GDP.
The improvement in the finances was driven almost entirely by lower borrowing by local authorities, reflecting spending cuts in services such as refuse collection, while tax revenue grew at the same pace as spending by central government.
The Office for Budget Responsibility fiscal watchdog gave a cautious assessment of the data, saying it expected revenue from value added sales tax and tax on bankers' bonuses to be much weaker in the last two months of the fiscal year, while central government spending could yet pick up.
Conservative and Liberal Democrat coalition government has made erasing the country's budget deficit -- which was at a peak of 11 percent when they came to power in 2010 -- a cornerstone of their economic policy.
But Osborne has been facing calls from within his own Conservative party to cut business taxes to stimulate growth, while the opposition Labour party has been urging him to make a temporary cut in value added tax. The Liberal Democrats want him to raise the threshold at which people start paying taxes.
But a choppy growth outlook for the rest of this year could make it harder for Osborne to reduce borrowing further out, leaving little leeway in the March 21 budget, analysts said.
We are doubtful that there will be big giveaways in the budget. He will bank the headroom and create a buffer for unwelcome events, and show to agencies like Moody's that he is serious about tackling the deficit, said Victoria Cadman, economist at Investec.
The government has already been forced to admit that a subdued growth outlook means it will take two years longer than planned to eliminate the deficit.
And some economists warned that an uncertain outlook meant it could struggle to meet its debt reduction target for 2012/13.
Data on Friday is expected to confirm the economy shrank by 0.2 percent in the final three months of 2011 and, although there are now signs of a rebound, output could drop again in the second quarter due in part to public holidays for the Queen's diamond jubilee celebrations.
The finance ministry said the data showed its measures were on track. Our credible deficit plan is working and bringing government borrowing down, said a Treasury spokesman.
The ONS figures showed total government receipts rose 2.8 percent on the year to a record high of 60.9 billion pounds. Total government expenditure rose at roughly the same pace.
However, local government posted a small surplus of 0.4 billion pounds in January compared with a deficit of 1.9 billion a year ago, helping to drive the overall surplus higher.
(Additional reporting by David Milliken, Olesya Dmitracova, Sven Egenter and Tim Castle; Editing by Stephen Nisbet)