George Osborne faced fresh questions about the credibility of his austerity policies just days before the budget on Wednesday night, when Fitch became the second of the major credit ratings agencies to warn that the UK’s coveted AAA-rating is at risk.
Echoing the recent decision by Moody’s to place the UK on so-called “negative watch”, which signals that it could be stripped of AAA status, Fitch said a weaker than expected recovery in the economy could jeopardise Osborne’s chances of tackling the debt burden.The announcement came just a day after the chancellor floated the idea of selling 100-year bonds to take advantage of current high demand for the UK’s bonds.
In a statement released after the London markets had closed on Wednesday, Fitch warned that the UK had, “very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery”.It said there was now a “slightly greater than 50% chance” that the UK would be stripped of its AAA-rating over the next two years.Analysts at Fitch highlighted the eurozone debt crisis – and the risk that the supply capacity of the economy has suffered permanent damage as a result of the credit crunch – as risks to the government’s tax and spending forecasts.
But the Treasury stressed that the other threat to the AAA score highlighted by Fitch was “discretionary fiscal easing”, a decision by the government to abandon its deficit-cutting strategy.A Treasury spokesperson said: “A week from the budget, this is a reminder of why it is essential Britain sticks to its plans to deal with its debts. This is just another warning to anyone who believes there can be deficit-financed giveaways in next week’s budget.”
Osborne, who is in Washington this week with the prime minister, David Cameron, is likely to use this latest shot across the government’s bows by the bond markets to strengthen his hand in seeing off demands for handouts in next week’s budget. Osborne has already signalled that if as many analysts expect the deficit is lower than forecast, he will bank the extra cash instead of spending it.The actions of the powerful credit ratings agencies have come under growing scrutiny by politicians around the world since the financial crisis.
Standard and Poor’s, the third major agency alongside Moody’s and Fitch, downgraded the US economy last summer, unleashing chaos on financial markets – although the Treasury is keen to point out that the cost of borrowing for the US government has not risen sharply as a result. Other countries, including France and Austria, have since faced downgrades.
Fitch said the UK’s debt levels were at the limit of what it would usually consider to qualify as a AAA country, although it added that quantitative easing, the Bank of England’s policy of buying government bonds to help boost the economy, was helping to lower the cost of borrowing for the Treasury. – Guardian