By David Milliken and Suban Abdulla
LONDON (Reuters) -Britain chalked up its highest ever monthly budget surplus in January due to record seasonal tax inflows, official figures showed on Wednesday, although the broader picture remains tough as finance minister Jeremy Hunt prepares his annual budget.
The Office for National Statistics said Britain ran a budget surplus of 16.7 billion pounds ($21.1 billion) in January, up from 7.5 billion pounds a year earlier although below economists' 18.7 billion pound forecast in a Reuters poll.
Britain's public finances typically run a surplus in January, unlike other months, as annual income tax payments are due that month.
Hunt will present his annual budget on March 6, and wants to cut taxes in order to boost the governing Conservative Party's popularity before the national election Prime Minister Rishi Sunak is expected to call later this year.
The Conservatives are heavily trailing the opposition Labour Party in opinion polls, and received a blow from official figures last week which showed the economy had fallen into a shallow recession in the second half of last year.
"January's public finances figures delivered some much-needed good news for the chancellor in the lead-up to the budget. But we doubt this will pave the way for a big pre-election splash," Ruth Gregory, deputy chief UK economist at consultants Capital Economics, said.
Gregory estimated that the government's fiscal headroom - the amount of extra spending or tax cuts possible while staying within its self-imposed budget rules - had only risen to 15 billion pounds from 13 billion pounds at the time of a mid-year budget update in November.
Other economists gave slightly higher estimates, with the Resolution Foundation think tank pencilling in 23 billion pounds and accountants KPMG forecasting 21 billion.
Either way, this headroom is below average historic levels and is based on budget plans for a squeeze on stretched public services after the next election, which the government has given few details about.
'TAX SANDWICH'?
Following Wednesday's borrowing data, Hunt's deputy, chief secretary to the Treasury Laura Trott, did not rule out further tax cuts in the budget, after reductions in November.
"While we will not speculate over whether further reductions in tax will be affordable in the budget, the economy is beginning to turn a corner," she said.
Despite the government lowering some taxes in November, Britain's overall tax burden has been rising, largely because thresholds for paying income tax have not been increased in line with wage growth or inflation.
"What Britain is being offered is really a 'tax sandwich'," Resolution Foundation research director James Smith said. "Juicy tax cuts in this election year are sandwiched between far bigger tax rises already introduced last year (and) a chunky package of tax rises that will come into effect after polling day."
Since the start of the tax year in April, borrowing has totalled 96.6 billion pounds, down from 99.7 billion pounds in the first 10 months of the 2022/23 tax year and the first such annual fall this financial year, helped by an upward revision to earlier tax receipts.
It is also below the 105.8 billion pounds which the government's Office for Budget Responsibility had forecast in November for this point in the tax year.
Central government revenue in January alone hit a monthly record of 111.4 billion pounds, up from 107.5 billion a year earlier.
Lower inflation has eased spending demands compared with a year ago, reducing debt interest payments - many of which are inflation linked - by 30% to 68.9 billion pounds for the year to date.
The longer-term picture for the public finances remains challenging, with overall public debt up sharply as a result of the COVID-19 pandemic, and roughly in the middle of the pack for large advanced economies.
Net debt on the government's preferred measure, which excludes public sector banks and the Bank of England, was 2.418 trillion pounds or 88.1% of gross domestic product in January - down slightly from December but up from 85.0% of GDP a year ago.
($1 = 0.7924 pounds)