Thu Mar 21, 2013 6:25am EDT
By David Milliken and Christina Fincher
LONDON, March 21 (Reuters) - Britain had a far smaller-than-expected deficit in February and retail sales got a boost, data showed on Thursday, a fillip for finance minister George Osborne a day after he released dismal economic forecasts.
Deficit reduction is the central economic policy of Britain's Conservative-led coalition government, which came to power in May 2010 when Britain's budget deficit was more than 11 percent of annual economic output - one of the highest for a major economy.
The government's budget plans have been plagued by weak growth, but retail sales figures released at the same time as the borrowing figures suggested at least some temporary relief after a dismal January for retailers.
The government's preferred measure of Britain's public borrowing, which strips out some of the effects of its bank bailouts, showed a deficit of just 2.756 billion pounds in February, the Office for National Statistics said on Thursday.
This is roughly a quarter of the 11.756 billion seen in February 2012 and far below analyst forecasts of deficit of 8.45 billion pounds.
The statistics office did not translate this into a percentage of output, or gross national product. Osborne announced on Wednesday that GDP would grow just 0.6 percent this year, half the previous prediction.
Britain is teetering on the brink of its third recession in four years - something Thursday's data may help it avoid. Growth is better than in the euro zone which is expected by many to contract this year. But it pales against other countries.
Sterling rose to a two-week high against the dollar and a five-week high against the euro after the data.
February's figures are flattered by a known 2.6 billion pound transfer of cash from the Bank of England under a deal to return gilt interest to the government, and 2.3 billion pounds from the sale of next-generation mobile phone frequencies.
But underlying performance was also strong, with a drop in local government spending and stronger central government tax receipts.
"It's mildly encouraging and we can see why sterling rallied on the back of that news," said Tom Vosa, economist at National Australia Bank. "Public sector borrowing now looks to be in line with the stronger employment growth and perhaps again more consistent that we have avoided the technical recession."
Separate official data showed that retail sales volumes rose 2.1 percent on the month, versus expectations for a 0.5 percent rise, and were 2.6 percent higher on the year - both the strongest rises since March 2012.
A bounce back from a snowy January and strong demand for tablet computers, sports goods and jewellery helped sales, the statistics office said.
Still, there were signs of weakness in the retail sector. Next, Britain's second-biggest clothing retailer, said trading in its new financial year had got off to a slow start.
Thursday's data showed Britain's total public debt, excluding the cost of bailing out its banks, rose to 1.1615 trillion pounds, equivalent to 73.5 percent of annual economic output, just shy of December's record 75.1 percent.
Since the start of the tax year in April 2012, borrowing has totalled 94.9 billion pounds, excluding a one-off boost from the transfer of Royal Mail pension assets.
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