By Martin Kelly
UK Chancellor George Osborne’s credibility has suffered another embarrassing blow after a second major credit agency downgraded the UK’s credit rating to AA+ from AAA.
On Friday evening Fitch became the second agency to strip the UK of its triple-A rating after describing the UK economic prospects as “weak” and forecasting higher budget deficits.
In a statement, the agency said: “Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the U.K. economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis,”
In another stark reminder of the challenges facing the UK economy, the agency revealed that the UK came close to being downgraded two notches and was only saved due to what it said was the UK’s “high-income, diversified and flexible economy”.
The agency has also slashed its growth forecasts for the UK, almost halving its 2013 forecast from 1.5% to 0.8% and its 2014 forecast dropping from 2% to 1.8%. UK debt levels will peak, it said, in 2014/15 to 101% of GDP and not begin to fall until 2017/18.
There was a warning of savage public spending cuts following the next UK General election with Fitch saying: “The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilized and reduced over the medium term,”
The downgrade comes on the same day that the Bank of England’s next governor – who has been appointed by the Chancellor – downplayed hopes of a boost to growth and warned that he would be moving to a “crisis” economy when he takes his position in the UK later this year.
Mark Carney, the successor to Mervyn King said there were three classes of countries in the global economy; crisis economies, those emerging from crisis, and those growing strongly.
Mr Carney, who takes over from Mr King as head of the Bank of England in July, contrasted recent positive signs of recovery in the US economy with the stagnation still apparent in the UK and said:
“The US is breaking out of the pack of crisis economies that include the Eurozone, the UK and Japan.”
Mr Carney said it was not the role of a central bank to deliver sustainable growth, pointing out that this depended upon governmental fiscal and stuctural reforms.
“Can central banks deliver sustainable growth? No. What they can do is provide conditions for growth – price stability, helping with balance sheet repair, very importantly helping with the transition,” he said.
“But they cannot deliver long term growth which needs to come through true fiscal adjustment and structural reforms. I’m not going to wade in [on fiscal policy] positively or negatively.”
The comments follow calls from the International Monetary Fund earlier this week for George Osborne to reconsider the UK government’s austerity agenda. The IMF has slashed its forecasts for UK growth – more than any other major economy.
Commenting, SNP Treasury spokesperson Stewart Hosie MP said:
“Mark Carneys comments are a hammer blow to the Chancellor. We know with every day that passes that George Osborne and Danny Alexander’s plans are completely backfiring. The UK’s stagnant performance also shows a fall in industrial output of 2.1% in the last quarter of last year.
“The Scottish Government is using the levers available to it to produce better outcomes – with lower unemployment including youth unemployment than the rest of the UK – and a focus on capital investment. The economic failure of the Westminster system shows why the economic levers should be in the hands of Scotland with independence – not George Osborne and Westminster.”
Responding to the news that the UK credit rating had suffered a second downgrade, this time from Fitch, Mr Hosie added:
“The Chancellor’s day has gone from bad to worse. This morning he suffered embarrassment following comments from the next Bank of England boss who gave little expectation of UK recovery, and now Fitch has cut the UK’s credit rating.
“And in the same week the IMF recommends he re-thinks his austerity agenda as it cuts it’s UK growth forecast. Osborne’s credibility is in crisis.
“For all his boasting and bragging about taking the UK economy ‘out of the danger zone’ he has now failed on his own measures and in the eyes of the international community.”
Commenting on the downgrade by Fitch, Ed Balls, Labour’s shadow chancellor, said: “This is another humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the number one test of their economic and political credibility.
“And it ends a disastrous week for George Osborne’s economic policy after the IMF downgraded its UK economic forecasts again and warned Britain needs a plan B for jobs and growth,”