* Public borrowing so far in 2017/18 lowest in 10 years
* European Union budget credit helped narrow shortfall
* VAT receipts strongest on record
* Finance minister Hammond on track to meet target
* Bigger challenges lie ahead to wipe out deficit
(Adds detail, economist's comment, background) LONDON, Jan 23 (Reuters) - Britain's budget deficit fell by much more than expected last month, helped by an unusually large credit from the European Union and the strongest value-added tax receipts on record. Tuesday's data will help finance minister Philip Hammond to meet his goal to lower public debt to help the world's sixth-biggest economy withstand any shocks in the years ahead as Britain leaves the EU. However Hammond is facing growing calls from fellow ministers to release his grip on spending to counter a resurgent opposition Labour Party. Foreign Secretary Boris Johnson was due to demand an extra 5 billion pounds ($7 billion) for the state-funded National Health Service on Tuesday, The Times newspaper said. The Office for National Statistics (ONS) said public sector net borrowing, excluding state-owned banks, totalled 2.6 billion pounds last month, almost half the borrowing level of December 2016. It was also below a median forecast of 5.0 billion pounds in a Reuters poll of economists. The public finances were helped by a 1.2 billion-pound credit from the EU, which reflected a cut in the bloc's overall budget and updated economic forecasts for member countries, the ONS said. Many countries in the EU saw stronger-than-expected economic growth last year, outperforming Britain, potentially lowering London's contributions to the bloc's budget. The ONS said public borrowing since the start of the financial year in April totalled 50.0 billion pounds, nearly 12 percent less than in the same period of 2016 and the lowest year-to-date total since 2007. That leaves Hammond on course to meet the target set by the Office for Budget Responsibility, Britain's fiscal watchdog, of 49.9 billion pounds in the 12 months to the end of March 2018 - equivalent to 2.4 percent of gross domestic product. Figures for January, when self-declared income tax returns flood in, are likely to show a budget surplus. "December's public finance figures provided some good news for the chancellor," Ruth Gregory, an economist with consultancy Capital Economics, said. "However, we shouldn't get too carried away by these figures.... We doubt that borrowing will come in too much below the OBR's current forecast," she said.
DEFICIT DOWN When the Conservative Party took power in 2010, the budget gap stood at a towering 10 percent of economic output, about four times its current size. While Britain looks set to do better than expected in bringing down the budget deficit in the current financial year, the outlook further ahead remains challenging. The OBR has penciled in nearly 30 billion pounds in extra borrowing over the next four years. That adds to the challenge for Hammond who has said he wants to wipe out the budget deficit altogether by the mid-2020s. To do that, budget experts say he will need to take politically tough decisions about spending. The ONS said value-added tax receipts in December were the strongest for any month on record, up by an annual 4.9 percent to 12.3 billion pounds. The ONS said income tax revenues, including capital gains, rose by more than 5 percent in December and were up nearly 4 percent in the first nine months of the financial year, reflecting continued strong job creation over the period. Corporation tax revenues recovered from recent weakness to show a rise of nearly 3 percent in the financial year to date.
(Writing by William Schomberg; Editing by Gareth Jones)