Osborne misses target for UK deficit, downturn signals grow

By David Milliken and Ana Nicolaci da Costa

LONDON (Reuters) - Britain's budget deficit has overshot Chancellor George Osborne's target and retail sales fell sharply in March, adding to signs of a slowing economy, according to data released on Thursday.

Underscoring the challenge Osborne faces as he tries to turn a still large budget shortfall into a surplus by the end of the decade, public borrowing, excluding banks, came in at 74.0 billion pounds in the 2015/16 tax year.

The deficit was slightly above the 72.2 billion-pound forecast set for Osborne by Britain's fiscal watchdog and economists said Thursday's figure might eventually be revised lower.

"However, the key question is how well economic growth will hold up over the next year or two. This will be the main determinant of tax revenue growth and so future public borrowing levels," John Hawksworth, chief economist at PwC, said.

The shortfall was equivalent to 3.9 percent of national economic output, down from 5.0 percent in the 2014/15 year.

The Office for National Statistics also said retail sales volumes dropped 1.3 percent on the month in March, a bigger fall than any of the forecasts in a Reuters poll of economists and matching the biggest fall since January 2014.

Retail sales rose 0.8 percent in the first three months of 2016, the weakest calendar quarter in a year.

British consumers have driven the economy over the past three years, buoyed by record employment, rising wages and near-zero inflation. But signs of weakness have appeared recently.

The Bank of England has said the economy is suffering from uncertainty about the outcome of a June 23 referendum on whether Britain should leave the European Union, as well as headwinds from weakness in many emerging markets.

The slowdown has become a headache for Osborne. In his March budget statement, Osborne admitted defeat on one of his key fiscal goals - reducing national debt as a share of GDP each year - as an economic slowdown weighed on tax receipts.

He later had to reverse plans to cut disability benefits, complicating the task of hitting by a budget surplus by 2020.

After the latest budget deficit data was released on Thursday, the country's debt office raised slightly the amount of government debt it plans to sell this year.

Osborne has prioritized fixing the public finances since he became finance minister in 2010 when the deficit exceeded 10 percent of GDP. But progress has been slowed by weak economic growth, in part due to problems in the euro zone. Some economists say his austerity plan has been counterproductive.

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There were some encouraging signs for him in the data. Public spending growth last year was just 0.3 percent, its lowest since comparable records began in 1997, and the amount of money raised from income tax and social security contributions rose 4.2 percent, its fastest rate since the financial crisis.