UK's consumer slowdown ripples through Britain's economy

By Andy Bruce and William Schomberg LONDON (Reuters) - The Brexit squeeze on British consumers has hurt the government's finances as well as retailers, data showed on Tuesday, indicating that the economy's slowdown at the start of the year is now being felt more broadly. A stalling of sales tax revenues, a barometer of the economy, helped to widen Britain's budget deficit by more than expected, official data showed. A separate survey showed business confidence among retailers declined at the fastest pace since 2012, around the last time Britain flirted with recession. Britain's economy was barely ruffled last year by June's shock vote to leave the European Union. But a steady rise in inflation since the referendum, combined with weak wage growth, has slowed its momentum this year. Official figures due on Thursday are expected to confirm that the pace of growth more than halved in first three months of 2017, a contrast with strong growth in the euro zone so far this year. "Today's numbers show the public finances have started to feel the effects of the economic slowdown, which will likely continue to feed through to softer revenue growth," said HSBC economist Elizabeth Martins. The headline budget deficit measure rose 13 percent to 10.4 billion pounds ($13.5 billion) in April, the first month of the fiscal year, the Office for National Statistics said. The figure was higher than all forecasts from economists polled by Reuters. As well as slow growth in tax revenues -- payments of income tax rose by little more than 1 percent from a year earlier -- the overshoot reflected a sharp jump in interest payments on British government bonds, some of which are linked to inflation. Prime Minister Theresa May, who opinion polls show is on course to win a June 8 election, wants to eliminate the budget deficit by the middle of the next decade. Martins from HSBC said running down the shortfall may prove trickier than in the past because many of the easier savings measures have already been made. The scale of the challenge has been illustrated by the uproar over May's plans to shift more of the cost of caring for elderly people from taxpayers to homeowners. On Monday, May softened the plan by saying she would make sure there was a limit on the amount people would have to spend. The uncertainty about how sharply Britain's economy will slow is also taking a toll on retailers' investment and hiring plans, the Confederation of British Industry (CBI) said. The CBI's monthly retail sales balance slid back to +2 in May from +38 in April, a four-month low and worse than all forecasts in a Reuters poll of economists that had pointed to a reading of +10. "It's clear that households are increasingly feeling the pinch, as rising inflation pushes down on real earnings," CBI economist Alpesh Paleja said. Also on Tuesday, accountants EY said Britain continued to attract foreign investment but there were also warning signs that Brexit might hurt its appeal. Britain remained the number one location for foreign direct investment in Europe in 2016, ahead of Germany, according to a survey conducted by EY. But Germany extended its lead in terms of securing new investment -- rather than expansion of existing projects -- and it also added to its advantage in attracting projects from emerging economies such as China. Furthermore, almost one third of global investors expected Britain's attractiveness to deteriorate over the coming three years, "suggesting Brexit may be starting to colour investors' views of the UK," EY said. (Editing by Catherine Evans)