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Britain’s top credit rating comes under threat
Rating agencies are thought to be considering a downgrade for the UK as a result of the new borrowing plans set out in the Budget
Ratings agencies Moody's and Standard & Poor's are believed to be conducting a review of the UK's prized AAA credit rating after it was revealed in the Budget that national debt will reach £1.4tr over the course of the next five years. Close neighbour Ireland has already been downgraded as well as a handful of European countries, but a cut in the UK would mean higher interest rates for the entire nation.
Arnaud Mares, Moody’s UK analyst, suggested that either “…fiscal policy will have to be tightened much further than currently envisaged” or “The alternative would be that the Government chooses to live with a permanently higher debt burden which would likely have rating implications over time."
The possible downgrade comes in the wake of the chancellor’s announcement that the government will have to borrow £175bn this year as the economy reels from the effects of the recession.
And with official figures showing today that the UK economy continued to shrink in the first three months of the year at a greater rate than at the end of last year (1.9 per cent in the first quarter), there is little respite in sight.
A rating downgrade would raise the costs of borrowing for the government and result in higher interest rates for borrowers as well as higher taxes, as the Government tries to replenish its finances. It would be devastating news for consumers, already struggling with unemployment and the sapping effects of the recession.
WHAT THEY ARE SAYING
Jeff Randall, Daily Telegraph: "In order for Mr Darling not to overshoot his wild borrowing forecasts, some heroic assumptions need to be made about Britain's prospects for robust recovery. So, guess what? He's made them – in spades. By 2011, the British economy will be powering ahead – yes, expanding by 3.5 per cent annually (well above long-term trend). It really will. Lovely jubbly. The genius of this approach is that it enables the Treasury to predict that public-sector net borrowing in two years' time will be down to a "manageable" £140bn, just 11.9 per cent of GDP. Covering this claim is a wafer of credibility so thin that even a blind mole in a deep sleep could see through it."
Martin Wolf, FT: "Is the UK once again the economic sick man? Or is it, as Alistair Darling, Chancellor of the Exchequer, argued in his Budget speech on Wednesday, just one of a number of hard-hit high-income countries? The answers to these questions are: yes and yes. The explanation for this ambiguity is that the fiscal deterioration is extraordinary, but the economic collapse is not." ·
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The UK is indeed one of the sick men of EUrope. But the causes are worsened, compared to the 1970s, when we had to go cap in hand to the IMF to bail us out under a spendthrift Labour government, of course. The worsening of our situation is that we are in the spendthrift EU and we are the second largest *net* contributor to the EU, after the dear old Germans. Most of the others are takers, that is why they are in the EU. Even worse, under vaguely worded clauses in the duplicitous Lisbon Treaty, we may end up bailing out spendthrift Greece before our own crisis comes to a head. And in fact, as anyone can see, if that happens, our own crisis will come that much quicker. But by then everyone might be ready to call for the heads of all UK politicians who want to keep us in the spendthrift EU, ruled by the spendthrift EU, and funding the spendthrift EU. The worst of all worlds. Who will be first against the wall when the revolution comes, eh?