LONDON (Reuters) - British public borrowing fell to a 16-year low during the financial year just ended, according to official data which may increase pressure on finance minister Philip Hammond to relax his grip on public spending.

Britain's Chancellor of the Exchequer Philip Hammond arrives in Downing Street, London, April 24, 2018. REUTERS/Henry Nicholls

The budget deficit for the financial year which ended in March dropped to 2.1 percent of gross domestic product from 2016/17’s 2.3 percent, the lowest since 2001/02.

In cash terms, borrowing was 8 percent lower than a year before at 42.6 billion pounds, below the 45.2 billion pounds forecast by Britain’s budget watchdog last month.

It was also comfortably under the watchdog’s previous forecast of just under 50 billion pounds, set in November.

Hammond has made fixing the public finances his priority, although he has taken a slower approach than previous finance minister George Osborne who inherited a deficit equivalent to just under 10 percent of GDP in 2010.

Hammond has made more progress than expected on improving the public finances because Britain’s economy slowed less than feared after the 2016 Brexit referendum shock.

However, Hammond still faces tough choices after promising to end years of real terms pay cuts for many public sector workers at a time when he is also facing calls to spend more on health and other services.

Hammond says he wants to get rid of the deficit altogether the mid-2020s but, conscious of the weariness of many voters after a decade of spending restraint, he has suggested he could announce more spending in his budget in November.

In a tweet, Hammond reiterated a previous comment that Britain’s economy was at “a turning point”.

“The key challenge facing the chancellor in his budget in November will be how to trade-off growing political pressures to ease austerity against his desire to get the debt ratio down as far as possible before the next economic downturn hits,” John Hawksworth, chief economist at accountancy firm PwC, said.

DEBT HEADING DOWN

Public debt stood at 1.798 trillion pounds, or 86.3 percent of GDP, up from 85.3 percent in the previous financial year and more than double its level before the financial crisis.

The headline public sector net debt figures are inflated the effect of a temporary Bank of England lending stimulus scheme.

Hammond wants to bring down debt as a share of GDP each year from the 2018/19 financial year, something which is a near certainty due to the impending reversal of the BoE scheme.

Stripping out the effect of the BoE scheme, net debt as a share of GDP has been falling for two years and touched a six-year low of 76.3 percent last year, albeit flattered by a changed treatment of public housing.

The current budget, which measures day-to-day government spending but not investment, showed a small surplus of 0.1 billion pounds in 2017/18, the first such surplus since 2001/02.

In March alone, the full budget deficit stood at 1.3 billion pounds, nearly 37 percent smaller than in the same month last year, the Office for National Statistics said.

The shortfall was also smaller than a median forecast of 3.25 billion pounds in a Reuters poll of economists.