Government borrowing hit an all-time high in December as the UK was forced to find £22bn to finance the Royal Bank of Scotland and for further aid to Bradford & Bingley.
The public sector net cash requirement, the amount the Government needs to borrow to fund its spending commitments, rose to £44.2bn last month, compared with £16.7bn in December 2007. Some £20bn of the £44bn total, the highest on record, was used for the bailout of RBS, while a further £2bn was used to provide working capital for Bradford & Bingley.
The unprecedented levels of borrowing contributed to a further deterioration of the UK public finances with the budget deficit in December rising to £11.4bn, compared to £4bn in the same month of 2007. A sharp fall-off in tax receipts, as the economy slowed, as well as an increase in spending on social security benefits, added to the crunch, though the latter was slightly lower than economists had expected.
Britain's net debt as a proportion of annual GDP stood at 47.5 per cent at the end of December. Stripping out the effect of financial sector interventions, it stood at 40.4 per cent, the first time the Labour Government has breached its sustainable investment rule – abandoned in the pre-Budget report (PBR) last year – that debt should not rise above 40 per cent of GDP.
Howard Archer, the chief economist at Global Insight, said the Government's borrowing projections, made in last month's PBR, were already beginning to look over-optimistic. He warned: "Given the rate at which the UK public finances are deteriorating and new measures are having to be introduced to try to support the financial sector and the economy, it is already abundantly clear that the alarmingly high government deficit projections are in fact significantly too low."
Mounting concerns about the state of the UK's economy, as well as the ongoing tensions in the banking sector, caused a further sell-off of the pound on the currency markets. Sterling fell by about 1.5 per cent against both the euro and the dollar, to €1.067 and $1.366 respectively, a level against the dollar not seen since the mid 1980s. It rallied in late trade on talk that sterling's weakness would be feature on the agenda of the next meeting of the G7.
Andrew Tucker, the next deputy governor of the Bank of England, said Britain was facing "very severe problems at the moment", and said policymakers were hoping to "slow the rate of decline and eventually turn it [the economy] around". However, giving evidence to the Treasury Select Committee, Mr Tucker, whose appointment was ratified by MPs yesterday, warned that there were no guarantees that the latest round of measures to support ailing banks would work.
"There are no dead certs and no silver bullets, but I think it is a good package," said Mr Tucker of the loans and guarantees announced by the Government this week. He said he did not support calls for the immediate nationalisation of banks. The Bank of England is also likely to announce further cuts in interest rates, analysts said yesterday, following the publication of the minutes of this month's meeting of the Monetary Policy Committee, which lowered the base rate by 0.5 percentage points to 1.5 per cent. The minutes reveal that the MPC voted by eight to one for the rate cut, with the lone dissenter, David Blanchflower, calling for a reduction of a full percentage point.
Jonathan Loynes, the chief European economist at Capital Economics, said: "January's MPC minutes and the latest news on the labour market do nothing to undermine the view that further monetary policy action is ahead, both in the form of further cuts in interest rates and, in time, the adoption of more explicit measures to boost the quantity of money in the economy."Reuse content