BRITAIN’S PUBLIC finances deteriorated sharply in December, putting them on track for their worst year on record, while the number of Britons out of work rose to a decade-high of almost two million.

The official data released yesterday pushed the pound to its lowest against the dollar in more than seven years as investors fretted about Britain’s growing debt burden and the fate of its banking sector. Even darker clouds are on the horizon. The public finances have so far felt only a fraction of the government’s bank rescue measures and rises in unemployment tend to lag weakness in the economy by several months.

“The public finances are deteriorating rapidly as the recession bites and there will be worse to come in 2009,” said Hetal Mehta, an economic advisor at Ernst Young.

The Office for National Statistics said the public sector posted a net cash requirement of £44.2 billion (€47.5 billion) last month, its highest on record.

The government’s acquisition of shares in Royal Bank of Scotland (RBS) accounted for almost half of that. A £17 billion investment in the Lloyds banking group, will move onto the government’s books in January.

As it strives to refloat the economy via extra spending and tax cuts, the government has already pencilled in public sector net borrowing of around £120 billion next year and analysts say that figure is likely to climb.

The government’s banking support package has a “reasonable chance” of success, the Bank of England’s next deputy governor said. “There are no dead certs and no silver bullets, but I think it is a good package,” said Paul Tucker. He warned MPs that if other advanced economies failed to take similar steps, the UK economy and the banking system would struggle to recover.

Britain was facing “very severe problems”, said Mr Tucker. His limited hope was to “slow the rate of decline and eventually turn ”.

Addressing the Treasury committee, he rejected calls to nationalise banks immediately, saying that, at times of crisis, the precise measures were not as important as taking action on a scale sufficient to tackle the problems. With its moves to underpin banks’ capital, increase their funding and ease corporate debt market strains, the package ought to be effective, he said.

While senior bank and Treasury officials insisted at the time of last October's recapitalisation package the move would succeed in getting credit flowing again, Mr Tucker said that it had had more limited aims. "We were perilously close to banks being unwilling to lend to each other – even overnight." – (Reuters, Financial Timesservice)