Darling to go on spending despite credit-rating risk
Moody’s warns that both UK and US are taking a risk with public sector expenditure
Leaked details of Alistair Darling's spending plans for next year suggest he will protect services such as the police, National Health Service and education thereby establishing a key policy difference with Conservative planning to sharply cut public service spending.
The Chancellor, a source within the government has told the Wall Street Journal, will finance his support of key services with a mix of savings, economic growth, taxes and spending cuts on non-frontline services.
Intriguingly, the source did not say anything about a ceiling on banker bonuses or the imposition of a special one-time tax on banks or bonuses. It doesn’t mean the Chancellor won’t do it, of course: most commentators this morning were still predicting a voter-pleasing punishment for the bankers’ role in bringing about the economic crisis.
Darling's decison to maintain spending raises the risk of Britain losing its AAA credit-rating. Credit agencies, which have
indicated they will not make a decision on downgrading Britain's rating until after the election, have said they prefer to see action to slow the growth of public borrowing sooner rather than later.
The inherent risks in Britain losing its rating were illustrated on a minor scale yesterday when Greece's foreign currency debt rating was cut from single A-minus to BBB-plus.
Coupled with further problems in Dubai, an unexpected fall in German industrial production, poor US figures for McDonalds - regarded as a recession-hardy business - as well as new or amended economic stimulus measures in Japan and the US, the Greeks' distress caused equity markets around the world to tumble.
Yesterday, the credit agency Moody's warned that the top debt ratings on the US and the UK may "test the Triple-A boundaries" because their public sector finances are rapidly deteriorating.
The agency considers both countries to have "resilient" AAA ratings, as opposed to the "resistant" top ratings of Canada, Germany and France. Neither the US nor the UK are considered to have stretched their situations beyond the point of no return - but they may not be far off.
The US debt burden is set to climb to 97.5 percent of GDP next year, up from 87.4 per cent, while the UK debt will swell to 89.3 per cent from 75.3 per cent this year.
"There has been a huge increase in debt-to-GDP ratios as a result of the crisis," David Keeble, head of fixed-income strategy at Calyon, the investment banking unit of Credit Agricole, told Bloomberg "It's right that there should be a lot of attention and pressure on these numbers."
So what can Darling do? He could start by saying sorry for not saving any money when the UK was at the top the economic cycle two years ago. ·
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