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Is cheaper Sterling the answer?

Government borrowing and national debt dominates much of the financial news at the moment. Everywhere you turn commentators, analysts and politicians are talking about how and when to start tackling multi billion dollar deficits. It's not just the UK that's deep in the red. Other nations such as the USA, Japan and Germany in their effort to stave off depression have actually ended up owing proportionally more of their GDP. Others such as Greece and Spain are finding themselves having to take drastic measures to reduce the burden.

As financial and public spending chickens start coming home to roost, an issue of particular concern to the UK government over recent weeks has been the decline in tax revenues used to service and reduce the money owed. For the first time since records began in 1993, January tax receipts failed to cover central spending. The shortage took analysts by surprise, as January is usually a bumper month for tax receipts with both capital gains and self-assessment payments due. With profits hard hit through the last two quarters of 2008/9, instead of the expected £2.8 billion surplus, the Government was forced to borrow an additional £4.3 billion. In fact income tax and capital gains tax receipts dropped 11.8% in total on 2008. A figure described by Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, as 'pretty ghastly'.

Rising departmental spending and higher interest repayments compounded the situation. “Debt interest payments are soaring and, given that government debt continues to grow, these payments are only going to get larger,” commented Andrew Goodwin.

A consequence of the need to borrow more has been devaluation in the value of Sterling. Mervyn King, the Governor of the Bank of England, warned in a speech that it may be necessary to continue the Bank’s asset purchase programme to support a continued record £178 billion deficit. This sent Stirling prices tumbling.

It's not necessarily bad news though. The world financial markets are dynamic environments. A weak pound would certainly make exports a far more attractive proposition, especially in booming foreign markets such as China, who are desperate for quality technology and machinery to sustain their growth. As long as inflationary pressures can be absorbed, a more competitive pound might be just the thing to keep British industry ticking over until the economy can get back on its feet again.


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