Home Financial News Standard & Poor’s warns Britain of possible rating downgrade

Standard & Poor’s warns Britain of possible rating downgrade

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Britain’s credit rating could be lowered if a new government fails to cut massive public debt, Standard & Poor’s warned on Monday as rival parties traded barbs over strained public finances.

With polls widely expected in early May, S&P affirmed Britain’s top-grade AAA rating but said it remained on “negative outlook,” meaning its creditworthiness could be revised downwards — a move that would cause major shockwaves in the global economy. “The outlook on the United Kingdom remains negative based on our view that… the UK’s net general government debt burden may approach a level incompatible with a ‘AAA’ rating,” S&P warned in a statement.

“We expect to review the long-term rating and outlook again once medium-term fiscal policy becomes clearer following the 2010 parliamentary elections,” the statement said, referring to polls expected on May 6. “The rating could be lowered if we conclude that the incoming government’s fiscal strategy is unlikely to put the UK debt burden on a secure downward trajectory over the medium term,” it added.

The ruling Labour Party and opposition Conservatives have made the public finances a key battle ground in the run-up to the polls. The government says it has had to spend massively, increasing both the budget deficit and total debt, in order to keep the economy on track during the worst global slump in decades. Any move now by the Conservatives to withdraw some of the spending so as to balance the state’s books will only undermine what is a still tentative economic recovery, Prime Minister Gordon Brown and his cabinet has argued.

The Conservatives in turn insist that a massive and growing budget deficit alongside soaring national debt endangers the longer-term future of the country and something must be done. They say spending must be cut but any moves have to be responsible and targeted, with taxes and costs reduced where possible. Earlier Monday, the Conservatives pledged to scrap a planned extra levy on workers’ personal income, saying it was “a tax on jobs and the middle classes.”

The planned rise in National Insurance contributions was “the economics of the madhouse,” said George Osborne, shadow finance minister, pledging that the Conservatives would cover the cost by cutting six billion pounds (nine billion dollars, seven billion euros) of “waste” from the public sector. S&P forecast that general government debt will rise to 77 percent of gross domestic product (GDP) in 2010 and approach 100 percent by 2014 — far higher than official forecasts — because of weak growth and a huge deficit.

The government forecasts debt to peak at 89.2 percent of GDP in 2013-2014. “As a result of the sizeable structural general government deficit, together with our weaker economic outlook, we project the general government gross and net debt burdens to continue on an upward trend,” it added. The ratings agency also said that the budget announced last week did not make any clearer how the government planned to deal with the debt in the medium-term, adding that there was “substantial uncertainty” over policy.

London, March 29, 2010 (AFP)