Strong income tax growth pushes UK borrowing to 8-year low

By David Milliken and Li-mei Hoang LONDON (Reuters) - Strong income tax receipts pushed British government borrowing to its lowest May reading since 2007, adding to signs that revenue growth could play a major role in debt-reduction plans being drafted by finance minister George Osborne. The budget deficit fell to 10.1 billion pounds ($16.05 billion) from 12.4 billion pounds a year earlier, a smaller gap than economists had forecast. After an unexpected outright election victory last month for the Conservative party to which Osborne belongs, he has said he will use a budget statement on July 8 to set out plans to commit future governments to run budget surpluses during normal economic times. That is something with little precedent in post-war Britain, and it could help reduce public debt faster after it to reach a record 1.5 trillion pounds in May, more than 80 percent of gross domestic product. Osborne says debt needs to fall substantially as a share of GDP before another financial crisis hits Britain, though economists at the International Monetary Fund and OECD have questioned how fast this should be done. Either way, it may not be enough to save Britain's last remaining triple-A sovereign rating, which Standard & Poor's put on a negative outlook last week because the Conservatives' plan to hold a referendum by the end of 2017 on whether to stay in the European Union risked damaging the economy. "With a long way to go in order to restore the public finances to better health, a major reintensification of the fiscal squeeze is looming," analyst Paul Hollingsworth at Capital Economics said. Friday's borrowing data offers the Conservatives some reassurance that after five years when spending cuts drove reductions in the budget deficit, higher tax revenues will play a greater role in future years. Income tax revenue rose more than 5 percent to its highest since May 2011, and combined income tax and social security receipts are at a record high. Record employment levels and rising wages should ensure further growth. Osborne failed in his original goal of almost eliminating a 10 percent budget deficit during the 2010-15 parliament, as growth and tax revenue proved much weaker than forecast. In March he pledged to run surpluses from the 2018/19 tax year. Even if tax revenues improve, big cuts in spending on welfare and government services are still to come. Revised statistics office figures showed the deficit stood at 4.9 percent of GDP in the year to March, higher than most developed countries. Osborne has asked government departments to find extra spending cuts for the current tax year, and many economists expect him to use July's budget statement to smooth the path of cuts set out in March. "Instead of sticking to the March budget profile over the next three years, the chancellor could 'ease the squeeze' on expenditure by averaging out the next four years' figures," Investec economist Philip Shaw said. This would reduce annual cuts to departments' spending to 1.8 percent rather than 3.7 percent, Shaw said. (Reporting by David Milliken and Li-mei Hoang; editing by John Stonestreet)