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Funds News

Record UK govt borrowing adds to sterling pressures

LONDON, Dec 18 (Reuters) - Falling tax receipts helped push British public borrowing to a record high last month, heaping pressure on the pound and heightening concern over how much it will cost the UK government to fund its economic stimulus plans.

Official figures showed public sector net borrowing rose to almost 16 billion pounds in November -- well above expectations and the highest monthly total since records began in 1993.

The current budget deficit also posted a record high of more than 13 billion pounds, almost double its level in the same month last year.

Burgeoning government borrowing and a tumbling currency have historically made unhappy bedfellows in Britain, and on previous occasions have driven up the interest payments required to attract investors.

A third of all British government bonds are now held by foreign investors, up from just 18 percent in 2002. Although gilts have rallied as the economy has plunged into recession, many foreign investors will have been stung by the pound’s steep decline.

In the past three months, the pound has sunk to record lows against the euro EURGBP= and a trade-weighted index =GBP, and shed more than 20 percent of its value against the dollar GBP=.

Analysts noted the deterioration in the public finances had occurred even before the government’s latest fiscal stimulus measures had kicked in, suggesting far worse was to come.

“The public finances look pretty awful,” said Vicky Redwood at Capital Economics. “It’s just worrying that they are that bad this early on in the recession.”

The government ramped up its borrowing projections last month to cover a 20 billion pound package of tax cuts and spending increases to counter Britain’s first recession since the early 1990s. It forecast borrowing of 77.6 billion pounds this fiscal year and 118 billion pounds in 2009/10.

In the next five years, public sector net debt is forecast to top one trillion pounds, accounting for more than half the economy.

Opposition politicians have accused the government of recklessness, claiming government borrowing will be a higher proportion of national income next year than when former Labour chancellor Denis Healey was forced to appeal to the International Monetary Fund in 1976.

MORE UPWARD REVISIONS?

Thursday’s figures from the Office for National Statistics show government spending so far this year is running more than 20 billion pounds above the same period last year, prompting analysts to question whether the government’s recent revisions to borrowing forecasts will be the last.

The government is currently banking on a fairly short and shallow recession, with a recovery beginning in the second half of next year.

“While alarmingly high, the government deficit projections contained in November’s pre-budget report are already looking too low as the recession looks certain to be significantly deeper and longer than the government forecast,” said Howard Archer at Global Insight.

Overseas central banks and sovereign wealth funds have been voracious buyers in gilts in recent years as governments have sought to diversify their foreign exchange reserves away from the dollar.

So far, despite the pound’s plunge, demand for gilts has remained strong. Yields on two- and 10-year gilts have plumbed a series of record lows in recent days as worries of a deep and protracted recession have boosted the appeal of government debt, overshadowing supply pressures.

“So far it seems investors are happy to have the safety and liquidity of government paper,” said Ross Walker, an economist at RBS. “It’s a cloudy picture but there is a certainly a risk that funding may become more difficult and expensive in years to come.”

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