Britain's public finances were in a better state than expected in February, making it highly likely the country's annual deficit will be far less than forecasts of a mighty £178bn.

Public Sector Net Borrowing (PSNB) of £12.36bn was less than the £14.75bn predicted, but still the highest figure for the month since the Office for National Statistics began keeping records, and more than last year's £8.77bn.

The budget deficit (PSNCR) came in at £7.70bn versus forecasts for £11bn and higher than the £4.68bn reported in February 2009.

Total borrowing for the current tax year is £131.87bn, well under the £170bn forecast by Chancellor Alistair Darling in December's Pre-Budget Report. He'll also be able to beat the headline figure of £178bn.

"The Chancellor may see this as giving him some "wriggle room" for one or two eye-catching, if limited, pre-election handouts in next week's budget," said Howard Archer, chief UK economist at IHS Global Insight.

A big downward revision to January's figure helped. PSNB is now put at just £43m rather than the £4.34bn originally predicted. Revisions so far this tax year have cut the budget deficit by £2bn and net borrowing by £2.9bn.

UK debt is now £857bn, or 60.5% of GDP, down from the 61.4% reported at the end of 2009, but many think this is bound to go much higher.

Archer remains cautious despite today's report. "February's public sector data are still pretty awful by any norm and do not materially alter the fact that the public finances are still in one almighty mess that will need extended corrective action regardless of how quickly it is started," he says.

Related share prices