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UK budget deficit narrows in May, bringing brief respite to Hammond

Britain’s budget deficit narrowed last month, helped by a recovery in value-added tax receipts, giving Chancellor Philip Hammond some respite ahead of an expected increase in borrowing later this year.

The deficit in May stood at 6.7 billion pounds, down nearly 5 percent compared with the same month last year, the Office for National Statistics said, citing figures that exclude state-controlled banks.

The shortfall matched the median forecast in a Reuters poll of economists.

The public finances were boosted last month by the biggest intake of value-added tax receipts for any May on record, after these sales taxes stalled in April.

Britain has been struggling to fix its public finances since the budget deficit surged to around 10 percent gross domestic product in 2010 after the global financial crisis.

Since then it has been cut steadily to 2.4 percent of GDP in the 2016/17 financial year which ended in March, its smallest since before the crisis.

While borrowing over the first two months of the 2017/18 financial year stands 0.4 percent lower than at the same point in 2016/17, the deficit is expected to increase later this year.

The Office for Budget Responsibility thinks it will widen to 2.9 percent GDP in 2017/18 when Hammond will have fewer one-off factors to help him.

Britain’s economy is also widely expected to slow as negotiations to leave the European Union progress. Households are already strained by rising consumer prices, fuelled by the pound’s sharp fall after last June’s Brexit vote.

On Tuesday he said he would stick to the fiscal rules he set out late last year, committing to balance the budget by the middle of the next decade.

The opposition Labour Party, emboldened by a stronger-than-expected showing in this month’s national election, has called on the government to relax its grip on spending and has linked a series of recent terror attacks and a deadly fire in a public housing tower block to budget cuts.

Hammond’s plan might come under pressure if Britain’s economy disappoints further after losing most of its momentum in the first three months of the year. However, he already has some room for manoeuvre within his existing plans allowing him to spend more if needed.

The ONS said income tax revenues rose 2.7 percent year-on-year in May to 11.7 billion pounds, while corporation tax revenues increased 2.5 percent to 4.7 billion pounds.

(Reporting by Andy Bruce and William Schomberg)

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