Sterling dives as UK public borrowing doubles forecasts at £11.8bn

Sterling fell to a new 37-year low against the US dollar on Wednesday after official figures revealed public borrowings were nearly twice as high as forecast in August.

The pound fell by a staggering 0.42 per cent to nearly $1.1349 after data from the Office for National Statistics showed UK government borrowing was £11.82 billion last month, against the agency’s May forecast of £6. billion.

The figures came as new Prime Minister Liz Truss’ finance minister Kwasi Kwarteng prepares for growth and delivers a mini-budget for tax cuts on Friday, with the expectation that stamp duties on home purchases could now be cut as well.

Rising inflation also meant that interest payments on UK government debt reached £8.2bn during the month, up £1.5bn from August 2021, the highest monthly rate since April 1997, and significantly ahead of the forecasts of £4.9 billion.

Public sector loans remain high at pre-Covid levels

Rising CPI average interest paid on inflation-related gilts has exploded

The ONS said: “Since mid-2021, the cost of paying off the national debt has risen significantly.

“These rising costs do not primarily reflect recent increases in government debt, nor is the change in service costs caused by large increases in government interest or coupon payments.

“Instead, the recent high levels of debt interest to be paid are largely the result of higher inflation, with interest to be paid on index-linked gilts rising in line with the Retail Price Index.”

Due to loans in August, net public sector debt stood at around £2.43 trillion at the end of the month, which is roughly 96.6 per cent of GDP, and an increase of £195.2 billion from the same time last year.

The numbers will raise concerns that the new government of Liz Truss’ commitment to ramp up fiscal support for households and businesses against the cost of living crisis could hurt public finances.

Chancellor Kwasi Kwarteng will provide more details on Friday about the government’s energy support package and proposed tax cuts.

Meanwhile, the Bank of England is set to make a decision on interest rates on Thursday, with markets now expecting a massive jump from 75 basis points to 2.5 percent as the bank tries to bring inflation under control.

Higher interest rates mean that the Treasury pays more to government bond holders.

Central government loans are lower than at this time last year, when it was still providing covid-related support to workers and businesses

While consumer price inflation is skyrocketing at about 10 percent, the latest ONS figures have not heightened concerns about stagnating economic growth. The BoE has previously forecast that the UK will enter five consecutive quarters of recession starting next month.

Tax receipts of £69.9 billion in August were just a small miss from the Office for Budget Responsibilities forecast of £70.5 billion.

Commenting on the latest figures, Kwarteng said: “I am committed to deleveraging in the medium term. But despite a major economic shock, it is only right that the government is now taking action to help families and businesses.

“Our priority is to grow the economy and improve living standards for all – where strong economic growth and sustainable public finances go hand in hand.”