By David Milliken and Andy Bruce
LONDON (Reuters) - Britain's public finances showed little or no fall in underlying borrowing two months into the fiscal year, suggesting the government will have to increase the pace of deficit reduction to meet its latest borrowing targets.
Official data on Friday showed headline measures of borrowing were sharply higher than a year ago - largely due to one-off effects - and only weak growth in tax receipts despite a stronger economy.
Britain's Conservative-led coalition government made reducing the deficit a key economic goal when it came to power in 2010, and will be keen to ensure that there is no further slippage in its targets before next May's election.
Public sector borrowing, excluding some costs related to bailing out banks, rose sharply to 13.3 billion pounds ($22.75 billion) in May, the Office for National Statistics said.
This is up from 8.7 billion pounds in May 2013 and well above analyst forecasts of a deficit of 9.35 billion pounds. Most of the difference reflects the fact that transfer payments from the Bank of England which were credited in May last year will only apply in July in the current financial year.
So far business surveys and data point to robust economic growth having carried through into the current quarter, which in theory ought to bode well for tax revenues in the coming months.
But there is little sign of this to date and overall receipts were just 0.5 percent higher in cash terms in the first two months of the tax year than a year ago.
"May's public borrowing figures contain tentative signs that the coalition may be beginning to struggle to bring down the deficit in line with the fiscal plans," said Samuel Tombs, senior UK economist at Capital Economics.
"While the economic recovery may now be fairly strong, it still appears to be struggling to have much of an impact on the borrowing numbers," he added.
British government bond prices fell slightly after the data and their yield premium over German debt hit its highest in more than 16 years.
But Britain's finance ministry said in a statement that the figures were still consistent with its goal of reducing borrowing by around 11 percent this year to 95.5 billion pounds or 5.5 percent of economic output.
SLOW FALL IN BORROWING
However, the latest figures suggest this may be a challenge, even taking into account some one-off effects.
Stripping out the effect of cash transfers from the Bank of England, the 2014/15 deficit to date was 24.2 billion pounds, 8.7 percent higher than at the same point a year ago.
This reflects a weak outturn in April - when payroll tax revenues were lower than a year earlier - as well as May 2013's receipt of payments from a Swiss tax deal. Stripping out the Swiss tax effect, the ONS said that May borrowing was 1.5 percent lower than a year before.
Public sector net debt rose to 1.285 trillion pounds in May, meaning that as a share of gross domestic product, it matched March's all-time high of 76.1 percent.
In a separate article released after the data, the ONS also gave more details of wide-ranging changes to public finances calculations due to take effect later this year, in part due to changed European Union guidance.
The underlying measure of public borrowing used in government fiscal forecasts will change. Whereas it showed a cash deficit of 107.0 billion pounds in 2013/14 - equivalent to 6.6 percent of GDP - under the new definition it would be just 98.7 billion pounds.
The downward effect on the deficit as a share of GDP is likely to be even larger, as other changes mean the level of GDP for 2013/14 is likely to be revised up by around 5 percent, although the ONS has not finished its calculations.
($1 = 0.5864 British Pounds)
(Editing by Catherine Evans)