British government debt breaks £1 trillion mark for the first time
BRITISH government debt rose above £1 trillion (€1.2tn) for the first time last month, highlighting the uphill struggle the administration there faces to curb borrowing amid growing signs that the economy is sliding back into recession.
The £1tn figure excludes money spent on shoring up the UK's crippled banking system. It is the highest since records began in 1993 and equivalent to around 64pc of gross domestic product.
Bank of England Governor Mervyn King said slower inflation gives policy makers room to increase bond purchases to aid the UK economy and guard against a "renewed severe downturn."
"With inflation falling back and wage growth subdued, there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2pc target," King said in a speech yesterday in Brighton. He also said tight credit conditions "will continue to act as a headwind to the economic recovery."
Although the UK government cut borrowing by more than £2bn in December from a year earlier, the eurozone crisis casts a pall over Britain's prospects and could yet derail plans to eliminate the budget deficit by 2017, in turn putting the nation's triple-A credit rating at risk.
The Office for National Statistics said yesterday that public sector net borrowing excluding, the government's bailout of the financial sector, fell to £13.7bn last month, below forecasts for £14.9bn.
This left the government on track to beat its target to cut borrowing in the 2011/2012 financial year to £127bn from £137.6bn the year before, with many economists pencilling in a figure of just £122bn.
The Office for Budget Responsibility, an independent body set up by the government to produce its fiscal forecasts, also indicated it expected the borrowing target to be achieved.
However, economists warned that the public finances could come under pressure in the remaining three months of the financial year as weaker growth eats into tax revenues and pushes up benefits claims -- effects that will take several months to show up.
Official data due to be published today is expected to show that Britain's economy shrank by 0.1pc in the last three months of 2011, and many economists reckon it will continue to contract in the first three months of this year as well.
Persistent economic weakness may even force Chancellor George Osborne to push his aim to balance Britain's books even further out into the future.
"There remains a very real danger that Mr Osborne will before long face the difficult decision of accepting further slippage in his fiscal targets, or imposing more fiscal tightening on a struggling economy," said Howard Archer, economist at IHS Global Insight.
David Cameron's government has staked its reputation on a five-year programme of austerity measures aimed at eliminating the budget deficit, and claims that record low interest rates on government bonds are proof that its policy is working.
Sceptics argue that a weak growth outlook and the Bank of England's quantitative easing programme to buy British bonds are the main reasons why investors are willing to accept interest of just 2pc on 10-year gilts.
The euro crisis also enhanced the perception of government bonds as safe. (Reuters)
Of the Group of Seven leading industrialised nations, only Britain, Canada and Germany have managed to cling on to top-notch ratings from all three main credit ratings agencies.
But Britain could drop out of that select group if the euro crisis takes a turn for the worse and tips the nation into a deep recession.
Moody's warned at the end of last year that the eurozone crisis was putting Britain's triple-A rating at risk and further shocks to the economy could derail government efforts to balance the budget. (Reuters)