BIG government debts and a slower than expected economic recovery have seen the UK’s outlook slashed by another credit rating agency, in a major blow to chancellor George Osborne.
Fitch announced last night that it was revising the UK’s outlook from stable to negative, one week ahead of the Budget – placing pressure on Osborne to get the public finances under control and reform policies to boost economic growth.
The verdict comes exactly one month after fellow rating agency Moody’s also placed the UK on negative outlook.
The UK retains its gold-plated rating, but the weaker outlooks suggest that it could be under threat in the near future.
“This is just another warning to anyone who believes there can be deficit-financed giveaways in next week’s budget,” a Treasury spokesperson said last night.
Fitch’s statement praised the coalition’s efforts to rein in the government’s huge annual deficit, yet warned: “The government’s structural budget deficit is second in size only to the US and indebtedness is significantly above the ‘AAA’ median”.
The government’s own fiscal watchdog expects general government gross debt to peak at the equivalent of 93.9 per cent of GDP in 2014-15, Fitch noted. The public sector net debt measure is on course to hit 78 per cent of GDP in the same year. Net debt excluding financial interventions is suspected to have already passed the £1 trillion mark.
Fitch said that British banks are “relatively well placed” to deal with potential shocks, but that the UK economy was still vulnerable to a hit from the Eurozone debt crisis. “The crisis is not resolved and could once more intensify,” the note said.
Osborne had also faced criticism earlier in the day over a new plan to issue extremely long term gilts to fund the government’s debts.
City economists said that the impact of the treasury’s plan to issue new 100-year government bonds will be minimal due to the Bank of England’s quantitative easing (QE) programme.
Osborne will use the Budget to kick off a study of demand for the issuance of 100-year or perpetual gilts in an attempt to “lock in” historically low interest rates on state borrowing.
City analysts said that the plan was “sensible” but that any benefit it could bring is being far outweighed by QE.
Henderson’s Simon Ward published a new analysis yesterday showing that the “effective” average maturity of Britain’s debt stock has dropped by 2.2 years since the Bank kicked off QE.
He said: “QE is having a much bigger impact in the other direction because the Bank of England is taking long-term bonds out of circulation and replacing them with bank deposits. The effective maturity of the UK’s public debt has fallen substantially over the last few years.”
Joanne Segar, chief executive of the National Association of Pension Funds (NAPF), also criticised the 100-year bonds, saying they were “too long” for most pension funds. “Pension funds are looking for 30, 40 and 50-year index-linked debt, and would much rather the government issue more of those.”