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The pound tumbled to within sight of parity with the euro yesterday after official figures showed the government's budget deficit had reached a record high in November.
The figures alarmed the foreign exchange markets because they showed the public finances were in trouble even before the tax cuts announced by Alistair Darling at the end of last month, implying that the government was going to be issuing even more debt than markets had expected to cover its ballooning deficits.
The pound fell to just above €1.05, or 95p to the euro. Sterling was also hit by comments from the Bank of England deputy governor, Charles Bean, who suggested that the interest rate, currently at 2%, could "fall all the way to zero".
Sterling has fallen sharply in recent months because dealers believe that Britain's economy, like that of America, could suffer worst in the slowdown because of its reliance on financial services. The pound has not suffered as badly against the dollar in recent days, however, and yesterday was trading above recent lows at around $1.52. It also recovered against the euro later in the day to above €1.06.
Analysts said parity between the euro and pound was now very possible. "There may be some psychological barriers at that level, but there is no reason why we shouldn't get there," Citigroup currency strategist Michael Hart said. The sharp fall against the euro also sent the pound tumbling to a record trade-weighted low against a basket of major currencies.
The Office for National Statistics (ONS) said that public sector net borrowing rose to £16bn in November, a much worse number than City pundits had expected and the worst since monthly records began in 1993. Borrowing was also £5bn more than in the same month last year. Dwindling tax revenues are hitting the public finances hard as unemployment rises and company profits fall.
Tax cuts included in last month's pre-budget report are likely to push borrowing up to £118bn next year, equivalent to 7% of national income.
The ONS said net borrowing surged to £56bn for the first eight months of fiscal year 2008/09, compared with £29bn a year earlier. The new figure means Darling has already exceeded the £43bn deficit he pencilled in for the whole of this year in the March budget.
"The public finances look pretty awful and it's just worrying that they are that bad this early in the recession," said Vicky Redwood, analyst at Capital Economics.
Philip Shaw, chief economist at Investec bank, added: "The scale of net borrowing is very, very disappointing; in particular, tax receipts seem to be very, very weak."
The ONS figures also showed that the national debt stood at £650bn at the end of November, equivalent to 44.2% of gross domestic product. And it also warned that the government's majority stake in the Royal Bank of Scotland would have the effect of bringing all the bank's liabilities - but not its assets - on to the public books for as long as the stake is held. RBS's liabilities are the equivalent of about 125% of GDP, so their impact on the public debt would be huge.
But Gemma Tetlow, analyst at the Institute for Fiscal Studies, said the government would consider the effect to be temporary, as in the case of Northern Rock, and would concentrate on the net debt position excluding bank liabilities when assessing the state of the public finances.
Shadow chancellor George Osborne said: "It's official - Britain now has the highest national debt in the developed world. The government's own statistics show that the UK owes over £100,000 per household, which adds up to 184% of our total national income. This is higher than Japan and three times that of France, Germany and the US. From now on, any claims that Britain's debt is low are laughable."
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