A tax windfall from Swiss banks has helped the UK post a bigger improvement in its public finances than expected, giving a boost to George Osborne ahead of his spending review next week.
But analysts warned that the shrinking deficit was largely down to one-off factors rather than longer-term changes. There was a deficit of £8.8bn in May, almost half the £15.6bn a year earlier, on the government's preferred measure for public borrowing, which excludes some of the effects of bank bailouts. The May figure was also well below the £12.6bn forecast by economists in a Reuters poll.
Publishing the figures, the Office for National Statistics said the deficit had been cut by two temporary factors: there was a reduction of £3.9bn thanks to receipts from the Bank of England's quantitative easing bond purchases and of £3.2bn due to be received from retrospective tax payments by Swiss banks.
That windfall follows a deal with Switzerland in January on the tax of Britons with undeclared Swiss bank accounts. Under the agreement, banking deposits of UK residents held in Swiss banks will become liable for taxation.
The flattering effect on the public finances will be welcomed by the government as it seeks to show it is clamping down on tax avoidance. But without it, economists said, the picture is barely one of a marked turnaround.
"The underlying deficit was fairly close to last year's. With borrowing still at very high levels, next week's spending review is a reminder of how much austerity still lies ahead," said Vicky Redwood, chief UK economist at Capital Economics.
"Indeed, the review [covering only 2015/16] will detail how only a fraction of the pain that still lies ahead will be achieved. Accordingly, the economic recovery still faces an uphill battle to establish itself against the continued drag from the public sector."
Still, many analysts say the government could achieve its near-term deficit-cutting goals based on the latest numbers. "It is, of course, very early days in the fiscal year and no doubt many twists and turns lie ahead. But it currently looks increasingly likely that Chancellor George Osborne will meet his fiscal targets for 2013/14 and could very well undershoot them," said Howard Archer at IHS Global Insight.
The Treasury said the latest data showed its policies were working. "The government is taking tough decisions to deal with the deficit: today's data shows that borrowing is lower than was previously predicted," said a spokesman.
But Labour highlighted the ONS data on the full tax year, just ended, that showed public sector borrowing actually edged up on a year earlier, once the many one-off factors are stripped out.
"With borrowing now confirmed as rising last year, these figures are another damaging blow to George Osborne's economic credibility," said Chris Leslie, the shadow financial secretary to the Treasury.
"The reason why the chancellor is failing to get the deficit down is because he has failed to boost living standards and economic growth."
Business groups are urging Osborne to use his spending review on Wednesday to bring in more programmes to boost the economy and employment.
David Kern, chief economist at the British Chambers of Commerce (BCC), said: "Next week's spending review gives the chancellor an opportunity to reallocate resources, focusing on measures to boost growth such as infrastructure investment, while continuing to make real cuts in current spending. Any room for manoeuvre must be used to help create jobs and drive economic growth."
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