UK public finances deteriorate sharply in August

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LONDON, Sep 24 (Reuters) Britain's public finances swung into the red last month as weak corporation tax receipts and high departmental spending led to the biggest deficit for August since records began.

The figures will come as a disappointment to Chancellor of the Exchequer Alistair Darling, already under fire for his handling of the Northern Rock crisis which prompted Britain's first bank run for more than a century.

They also raise question marks over the government's longer term targets at a time when financial markets remain jittery and economic growth is set to slow.

''The public finance data for August were substantially worse than expected, adding to Chancellor Alistair Darling's current woes,'' said Howard Archer at Global Insight.

''Furthermore, the public finances could be significantly hit over the coming months if the current financial market turmoil increasingly weighs down on economic activity, the housing market and City bonuses, thereby undermining tax revenues.'' The Office for National Statistics said the public sector's net cash requirement was more than 5 billion pounds last month. That exceeded forecasts for a reading of 3.4 billion and was the highest since records began in 1984.

The government's preferred accruals-based measure of borrowing -- which is less volatile than the cash measure -- was more than 9 billion pounds. This was also well above forecasts and the highest for a month of August since records began.

TOUGH TIMES AHEAD A breakdown of the figures showed a sharp drop in corporation tax receipts -- which almost halved to 704 million pounds from 1.28 billion pounds in August 2006 -- and a modest fall in VAT receipts.

August is traditionally a deficit month for the public finances and the deterioration follows record July surpluses.

Nevertheless, with the economy set to slow over the coming year, the government's full year borrowing target of 34 billion pounds looks more challenging.

''This month's disappointing data comes after a set of relatively positive numbers in the April-July period, so it is possible that they merely reflect a correction,'' said Adrian Cooper, economic advisor at Ernst&Young.

''However, some of the details do suggest that slower economic growth could be starting to weaken the growth of revenues.'' The government currently assumes growth will slow to around 2.75 percent over the coming fiscal year, but this forecast is looking increasingly optimistic. Investment banks have rushed to downgrade UK growth forecasts in recent weeks and some are forecasting growth no higher than 2.0 percent.

The government's debt-to-GDP target also looked less secure after the statistics office said it would reclassify London Underground's public-private partnership partners, Tube Lines and Metronet, from the private to the public sector for national accounts purposes.

The reclassification will be retroactive, taking effect from when the companies signed contracts with London Underground in 2002 and 2003.

However, the ONS said the cumulative revision to the public sector current budget over the economic cycle would be ''relatively small'', adding at most 0.1 percent to the public sector net debt to GDP ratio in any month.

REUTERS SR GC1924

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