U.S. Markets open in 4 hrs 27 mins

UK public finances strengthen in August, more progress seen

Britain's Chancellor of the Exchequer George Osborne arrives at 10 Downing Street, in central London September 18, 2013. REUTERS/Andrew Winning

By William Schomberg and David Milliken

LONDON (Reuters) - Britain's finances improved in August, helped by lower government spending, and economists said a pickup in the economy could mean Chancellor George Osborne beats his budget target this year.

The deficit fell to 13.16 billion pounds in August, based on the widely used measure of public borrowing which strips out some of the effects of Britain's bank bailouts.

That was down from 14.41 billion in August 2012, the Office for National Statistics said on Friday, and below forecasts in a Reuters poll for a deficit of 13.5 billion pounds.

Earlier this year, Osborne came under heavy fire from the opposition Labour party and saw off calls from the International Monetary Fund to spend more to boost growth. He is now likely to find it easier to stick to his plan to rein in the still-huge budget deficit as the economy picks up speed.

When the Conservative-led coalition came to power in May 2010, the deficit stood at 11 percent of annual economic output.

On an underlying basis - stripping out the effect of cash transfers from Royal Mail and the Bank - the government is aiming for a deficit of no more than 120 billion pounds or 7.5 percent of GDP this year, little changed from its share of GDP in the 2012/13 tax year.

For the first five months of the current tax year, the deficit on this measure totalled 46.8 billion pounds, down more than 7 percent compared with the same point in 2012, in part due to substantial downward revisions of previous borrowing estimates. There was also a lowering of the estimate for total borrowing in 2012/13.

"The government are likely to be quietly confident that they can undershoot the borrowing target come the end of 2013-14 given better prospects for the economy," Sam Hill, a fixed income strategist at RBC in London, told clients in an email.

That would give Osborne the chance to sound upbeat when he delivers a half-yearly budget statement towards the end of this year and would be a boost for Prime Minister David Cameron as he gears up for campaigning for the 2015 general election.

A long run of weak economic growth has limited tax revenues and made it harder for the government to cap social benefit costs. In a sign of the recovery starting to help public finances, revenues between April and August rose 2.8 percent compared to a year earlier.

On the spending side, in August alone total spending by central government - excluding investment - fell by 2.2 percent, led by a sharp drop in departmental spending. The figure was also helped by a change in the timing of distribution of funds to local authorities by central government.

Britain's total net public debt, excluding the direct costs of bailing out the country's banks, is still much higher than before the financial crisis at some 1.19 trillion pounds or 74.6 percent of GDP, a record percentage for the month of August.

(Writing by William Schomberg; Editing by Ruth Pitchford)