UK Chancellor George Osborne has been issued a pre-Budget warning by an influential credit rating agency as it issued a “negative” outlook on the prospects of the UK economy retaining its AAA rating.
Fitch moved the country’s rating from stable after deciding its exposure to a fresh eurozone crisis made it more likely than not that it would be stripped of its cherished top-rating by 2014.
Treasury Chief Secretary Danny Alexander said the move – which follows a similar downgrade by another of the top agencies last month – was a “salutary reminder” of the need to maintain austerity measures.
“There will be no unfunded giveaways in next week’s Budget,” Mr Alexander said – insisting the news should act as a “wake-up call” for those urging the Government to ease up on stringent deficit-reduction plans.
“This is a salutary reminder as to why Britain needs to deal with the enormous debts and deficits we inherited, why we have got to stick to those plans. It should be a wake-up call to anyone who thinks we can afford, as a country, to loosen the purse strings. We can’t afford to do that.”
Fitch said it considered the Government’s deficit-reduction plans to be “credible” and on track and that it expected them to be sustained in the Budget.
But it said that current projected levels of future debt were “at the limit of the level consistent with the UK retaining its AAA status”.
Although eurozone markets had calmed over recent weeks, there was still a risk that the crisis could re-emerge, the analysis concluded, spelling potential problems for the UK.
“The revision of the rating outlook to negative from stable reflects the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery,
“In light of the considerable uncertainty around the economic and fiscal outlook, including the risks posed to economic recovery by ongoing financial tensions in the eurozone and against the backdrop of a still large structural budget deficit and high and rising government debt, the Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon,” Fitch said.
If there are no major financial shocks and the economy remains on track, the rating will be returned to stable in 2014.
Shadow chancellor Ed Balls said the change was symptomatic of a “growing worry” about the UK’s prospects.
Chancellor Osborne is due to deliver the UK budget on March 21.
The Treasury yesterday also announced plans to take advantage of Britain’s historically low interest rates by taking out 'super-long' bonds which will not be repaid for 100 years or more.