GBP/USD has fallen to its lowest level in nearly 8 weeks, trading around $1.3372, as UK public sector borrowing reached £18.3 billion in August, significantly higher than the £2.04 billion recorded in July. According to the latest data from the UK National Statistics Office, this marked a jump of about a fifth compared with August last year, more than government income from taxes and other receipts. The figures highlight significant challenges facing Chancellor John Healey as he prepares his first Budget on October 28, requiring him to set out Prime Minister Andy Burnham's economic plans while reassuring a jittery bond market. Concerns about government finances and a buoyant dollar after the hawkish turn performed by the Federal Reserve last week are seen weighing on the pound. The £18.3 billion borrowed in August was also £3.5 billion more than official forecasters expected, making the shortfall particularly concerning for market confidence.
Inflation rose to its highest rate in five months in August, reaching 3.1% according to the Office for National Statistics, driven up by higher petrol and diesel prices. As reported by WPI Strategy chief economist Martin Beck, while tax receipts were higher in August compared with a year ago, spending on public services, benefits, and other costs grew more as the pace of price rises increased. The interest the government is paying on its debt rose to £8.8 billion, its highest August level since records began in 1997. The Institute for Fiscal Studies warned that spending on debt interest is "a worryingly large share of overall government spending and has been pushed up" since the last official forecasts from the Office for Budget Responsibility. Research economist Nick Ridpath noted that both higher borrowing costs and higher inflation make life harder for a chancellor looking to bring down borrowing and spend more on government priorities.
The 10-year gilt yield rose three basis points to 5.232% in early trading on Tuesday, while 30-year bond yields were also 3 basis points higher at 5.729%, reflecting the mounting pressure on government finances. As reported by Investing.com India, the rise in borrowing in August came despite improvements in tax receipts and reflected higher spending on public services and benefits, as well as increased debt interest costs. Healey's room for manoeuvre is becoming increasingly limited, as higher borrowing costs, partly triggered by the Middle East conflict, have already reduced the government's fiscal headroom. KPMG estimates that headroom could fall to around £12 billion from £23.6 billion in March. The borrowing deficit over the financial year so far has reached £77.3 billion – £8.1 billion above forecast, with the Institute for Fiscal Studies noting that since April, the government has spent £50 billion on debt interest, £2 billion more than forecast by the OBR in March. Speculation is therefore rising that the government will need to raise taxes or cut spending to rebuild its fiscal headroom.
GBP/USD broke down from the ascending channel, falling below the 50 and 200 EMAs. According to Investing.com India technical analysis, combined with the RSI below 50, this keeps sellers hopeful of further downside. Sellers will look to take out support at 1.3340 to turn attention to 1.3275, the late-July low. Below this level, attention turns to the 1.3200 support zone. Any recovery would first need to take out the 200 EMA at 1.3425, with a rise above this level targeting the 1.3500 resistance zone. The BoE left rates unchanged last week, creating BoE-Fed divergence that continues to pressure GBP/USD. Meanwhile, the U.S. dollar is pushing higher, extending gains to a seven-week high after the Federal Reserve hiked interest rates and signalled at least one more rate hike this year.
Emma Reynolds, chief secretary to the Treasury, acknowledged that the UK has "huge potential" for economic growth but emphasized the need for fiscal discipline. "At a time when debt interest costs billions of pounds that could otherwise be spent on improving lives, we must always know where the money is coming from to pay for public services," she said, adding that the government is committed to its fiscal rules "with a buffer against uncertainty." However, Conservative shadow chancellor Andrew Griffith accused the Labour government of "losing control of the public finances" by overshooting the OBR's forecasts. Economists think the chancellor may have to find £15 billion, perhaps through tax rises, to meet the government's self-imposed spending rules. Ruth Gregory from Capital Economics warned that the figures raise the likelihood of many of Prime Minister Andy Burnham's policy ambitions being "reined in or delayed to avoid big tax hikes and/or a backlash in the markets."
