Britain posts smallest September deficit for 10 years in boost for Hammond

LONDON, Oct 20 (Reuters) – - Britain posted its smallest budget deficit for any September in the last 10 years, a boost for finance minister Philip Hammond ahead of next month's annual budget.

Last month's deficit stood at 5.902 billion pounds, down almost 11 percent compared with the same month last year, the Office for National Statistics said on Friday, citing figures that exclude state-controlled banks.

The shortfall was much smaller than a median forecast of 6.5 billion pounds in a Reuters poll of economists.

September's figures marked the third straight month in which the public finances performed much better than analysts had expected, even as the prospect of Britain's departure from the European Union has weighed on the overall economy.

The deficit for August was also revised down by around a billion pounds to 4.716 billion pounds.

Finance minister Philip Hammond has come under pressure from within the ruling Conservative Party as well as from the opposition Labour Party to loosen his grip on public spending when he presents his annual budget next month.

But his ability to relax his grip of spending looks limited after Britain's budget forecasters said this month they were likely to cut their productivity growth forecasts, suggesting slower economic growth, and tax revenues, in the future.

For now, however, tax revenues remain healthy. The ONS reported strong receipts from value-added sales tax, income tax and the stamp duty property tax. But corporation tax revenues were down slightly compared with a year ago.

Britain paid out 3.7 billion pounds on government debt interest payments, up 11.4 percent compared with a year and pushed up by a rise in inflation. Around a third of British government bonds are linked to inflation.

A move by the Bank of England to raise interest rates in the coming months - something it signalled was likely in September - could push up debt payments further.

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

Since then it has been cut steadily to 2.3 percent of GDP in the 2016/17 financial year which ended in March, its smallest since before the global financial crisis.

But the deficit had been expected to widen again to 2.9 percent of GDP this year when Hammond will have fewer one-off factors to help him than last year.

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Hammond has not committed to balance the budget until the middle of the next decade, giving him some flexibility to slow the current pace of deficit reduction if needed to support the economy as the country leaves the European Union.