29 May 2009
By Tash Shifrin
Economists have warned that the cost of government borrowing could rise after grim public finance figures prompted a credit ratings agency to downgrade its outlook for the UK.
Standard & Poor’s Ratings Services revised its outlook on the UK from ‘stable’ to ‘negative’ on May 21, as the Office for National Statistics revealed record borrowing figures of £8.5bn for April – up from £1.8bn in the same month last year.
The outlook assessment is used to signal the direction that credit ratings are expected to take in future and means the government’s prized AAA credit rating could be downgraded.
Charles Davis, senior economist at the Centre for Economics and Business Research, told Public Finance: ‘The big danger is that investors become less happy to buy up UK government debt issuance… that would raise the cost of borrowing to government.’
S&P’s assessment reflected ‘ongoing concerns about the viability of the Budget plans’ for restoring the public finances, he added.
Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, said S&P’s statement did not mean a downgrading was certain. But she added that the upcoming general election added to the question marks over the state of the public finances.
‘In the political cycle, there’s a lot of uncertainty about what medium-term [fiscal] tightening will look like,’ she said, noting that the Conservatives were suggesting sterner measures to restore the Treasury’s coffers.
S&P credit analyst David Beers said the outlook revision was ‘due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of gross domestic product and remain near that level in the medium term’.
The agency had doubts about how quickly the shortfall in the Treasury’s tax receipts caused by the recession would be repaired and the extent of public spending cuts to repair the hole in the public finances.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, added to the pressure to clamp down on public spending. PwC figures showed that if a future government wanted to get debt back down to 40% of gross domestic product before 2050, ‘the cost could be an additional £30bn per annum at today’s values if action is taken by 2018’, he warned.
