S&P cites spending cuts in upgrade for UK outlook

STANDARD & Poor’s (S&P) yesterday affirmed the UK’s government’s AAA credit rating and upgraded its outlook from negative to stable. The ratings agency cited George Osborne’s spending review as the main reason for the upgrade, in particular the coalition’s “high degree of cohesion in putting the UK’s finance onto a more sustainable footing”.

It predicts that gross government debt will peak at 84 per cent of GDP in 2014 and that the current 11.2 per cent structural deficit could narrow to three per cent by 2014. This is still higher than official forecasts by the Office of Budgetary Responsibility (OBR)?that the deficit will narrow to 2.2 per cent by 2014.

This difference is in part because S&P thinks the OBR’s average GDP growth figure of 2.4 per cent is overly optimistic. The agency noted that “rebalancing of the economy will likely proceed more slowly than the OBR assumes”.