By David Milliken and Peter Griffiths
LONDON (Reuters) - Britain's budget deficit turned out to be smaller than feared in the first six months of the current tax year, giving the government hope it can meet this year's deficit-cutting target.
Friday's data reduces the chance that Chancellor George Osborne will need to announce extra spending cuts or tax rises in a half-yearly budget statement on December 5 to ensure borrowing in the current tax year falls in line with March's budget forecast.
However, the government may still have to announce cuts for future years if it is to meet another goal, that of putting debt as a share of national income on a downward path by 2015.
The Office for National Statistics said public borrowing in the first six months of the tax year was 2.6 billion pounds higher than the same period a year ago at 65.1 billion pounds, once certain one-off factors were stripped out.
This compares with a 10.6 billion pound overshoot estimated last month for the first five months of the tax year, and makes it more likely that Osborne will succeed in trimming borrowing for 2012/13 to 120 billion pounds from 122 billion in 2011/12.
"This is much, much better than they would have thought only a month ago," said Brian Hilliard, economist at Societe Generale. "It's still an overshoot compared to the plans but it does make their life a bit easier."
However, Osborne's plan to eliminate Britain's underlying budget deficit remains controversial as his Conservative-Liberal Democrat coalition nears the mid-point of its term in office.
Initial plans to achieve eliminate the deficit by 2015 have been pushed back two years as growth has been far weaker than forecast, and at 8.0 percent of GDP last year, Britain's budget deficit was still the largest of any major European country.
The opposition Labour Party says the pace of cuts is self-defeating, arguing that any savings made are outweighed by lower tax revenues caused by slower growth. And trade unions plan a big rally in London on Saturday to protest against austerity.
Nonetheless, Friday's data comes at the end of a rare week of good economic news for the government. Employment is the highest since records began in 1971, inflation is near a three-year low, and economists expect data next week to show an end to Britain's second recession since the 2008 financial crisis.
But the broader economic outlook is still weak, with economists forecasting a 0.3 percent fall in output for 2012 as a whole, and just 1.1 percent growth in 2013.
David Miles, the most dovish member of the Bank of England's Monetary Policy Committee, said in a newspaper interview on Friday that this weakness still justified a "super-expansionary" stance for monetary policy.
CORPORATION TAX HIT
The improvement in Britain's public borrowing this year was driven by a sharp downward revision to earlier estimates of borrowing between April and August, as well as lower than expected borrowing in September.
The government's preferred measure, public sector net borrowing excluding financial sector interventions, fell to 12.8 billion pounds in September from 13.5 billion pounds a year ago, well below economists' forecasts for an unchanged reading due to lower borrowing by local authorities and public corporations.
The Office for Budget Responsibility, which publishes a new assessment of Osborne's fiscal plans on December 5, said central government spending was growing at a slower pace than forecast. But these benefits were outweighed by very weak growth in tax revenues - largely due to lower corporation tax payments because of disruption to North Sea oil and gas production.
A return to growth should make the budget position easier over the next six months, and economists predict only a small overshoot of 2012/13's 120 billion pound goal, with Barclays seeing a 6 billion overshoot and Capital Economics 7 billion.
But if tax revenues do not pick up, and central government spending accelerates to grow at the planned rate, the overshoot would be nearer 15 billion pounds, the non-partisan Institute for Fiscal Studies said.
Moreover, weak growth makes meeting 2015's target to put debt as a share of GDP on a downward path a challenge. Net debt totalled 1.065 trillion pounds - or 67.9 percent of GDP - in September, up from 63.6 percent of GDP a year earlier.
(Editing by Jeremy Gaunt.)