By Lucy Phillips
17 March 2010
The government is risking its credit rating being downgraded by not taking ‘faster and deeper’ action to cut the public deficit, a leading economist has warned.
Lena Komileva, head economist at brokers Tullet Prebon, told Public Finance that the risk of a sovereign downgrade in the UK was ‘high’ because of the government’s failure to produce a credible plan to reduce the £178bn public deficit.
The cost of government borrowing was rising faster than in other major economies, undermining investor confidence and indicating that financial markets were already anticipating a downgrade of the triple-A rating, she said.
Komileva warned that such a downgrade would have ‘disastrous consequences’ for the economy, potentially leading to a sterling crisis. This would reverse the benefits of the government’s fiscal and monetary stimulus over the past year and rapidly increase public debt – as has occurred recently in Ireland and Greece.
Chancellor Alistair Darling’s commitment to halve the deficit by 2014 – made in the Fiscal Responsibility Act – was failing to mitigate the threat, said Komileva. The government’s plans were ‘widely removed from the accepted matrix of fiscal sustainability’, making them far from ambitious enough. ‘A [projected] budget deficit of almost 5% of gross domestic product in five years time is not going to stop the public debt from rising. It increases the risk of a credit downgrade and puts unbearable pressure on the economy. The plan clearly needs to be faster and deeper,’ she added.
Her comments came as a report from the European Commission, published today, warns that the Treasury’s plans were not in line with European Union rules to bring government deficits of member states below 3% of GDP by 2014/15. Chief Secretary to the Treasury Liam Byrne said meeting the EU targets would cause ‘irreparable damage’ to the UK economy.
But Komileva said the report was ‘significant’ because it would focus the markets’ attention away from fiscal pressures in the eurozone ‘towards the creditworthiness of the UK government’. She added: ‘It’s a credible warning and echoes the sentiment of economists in the UK, putting pressure on the government to act sooner.’
Komileva was speaking to PF ahead of her appearance in a debate on the implications of a debt downgrade at a CIPFA Treasury Management conference in London today. She called for the government to take rapid action ‘to raise market confidence by laying out a credible plan for reducing public debt over the medium term’, although said it was unlikely to do so in the March 24 Budget. She said the government needed new channels to reduce discretionary government expenditure by 2% of GDP and a commitment to keeping essential stimulus measures in place until the end of the year to mitigate wider economic risks.
Last week, Byrne appeared to rule out further tax rises under a Labour government although Darling has not offered such reassurance. But Komileva said: ‘The structural deficit is not going to disappear. It will require fiscal action through spending cuts and tax hikes in order to eradicate it.’ She added that ‘the best position the government can take is to pre-empt deeper questions in the market about debt sustainability’, allowing it to spread the cost of fiscal tightening over a longer period.
Komileva also said that the possibility of a credit downgrade would not go away after the election, whichever party came to power, but a hung Parliament presented an even bigger risk. Political differences in how to cut public spending and raise taxes could ‘become more deeply entrenched, which could stand in the way of rapid intervention’, she warned.
17 March 2010
The government is risking its credit rating being downgraded by not taking ‘faster and deeper’ action to cut the public deficit, a leading economist has warned.
Lena Komileva, head economist at brokers Tullet Prebon, told Public Finance that the risk of a sovereign downgrade in the UK was ‘high’ because of the government’s failure to produce a credible plan to reduce the £178bn public deficit.
The cost of government borrowing was rising faster than in other major economies, undermining investor confidence and indicating that financial markets were already anticipating a downgrade of the triple-A rating, she said.
Komileva warned that such a downgrade would have ‘disastrous consequences’ for the economy, potentially leading to a sterling crisis. This would reverse the benefits of the government’s fiscal and monetary stimulus over the past year and rapidly increase public debt – as has occurred recently in Ireland and Greece.
Chancellor Alistair Darling’s commitment to halve the deficit by 2014 – made in the Fiscal Responsibility Act – was failing to mitigate the threat, said Komileva. The government’s plans were ‘widely removed from the accepted matrix of fiscal sustainability’, making them far from ambitious enough. ‘A [projected] budget deficit of almost 5% of gross domestic product in five years time is not going to stop the public debt from rising. It increases the risk of a credit downgrade and puts unbearable pressure on the economy. The plan clearly needs to be faster and deeper,’ she added.
Her comments came as a report from the European Commission, published today, warns that the Treasury’s plans were not in line with European Union rules to bring government deficits of member states below 3% of GDP by 2014/15. Chief Secretary to the Treasury Liam Byrne said meeting the EU targets would cause ‘irreparable damage’ to the UK economy.
But Komileva said the report was ‘significant’ because it would focus the markets’ attention away from fiscal pressures in the eurozone ‘towards the creditworthiness of the UK government’. She added: ‘It’s a credible warning and echoes the sentiment of economists in the UK, putting pressure on the government to act sooner.’
Komileva was speaking to PF ahead of her appearance in a debate on the implications of a debt downgrade at a CIPFA Treasury Management conference in London today. She called for the government to take rapid action ‘to raise market confidence by laying out a credible plan for reducing public debt over the medium term’, although said it was unlikely to do so in the March 24 Budget. She said the government needed new channels to reduce discretionary government expenditure by 2% of GDP and a commitment to keeping essential stimulus measures in place until the end of the year to mitigate wider economic risks.
Last week, Byrne appeared to rule out further tax rises under a Labour government although Darling has not offered such reassurance. But Komileva said: ‘The structural deficit is not going to disappear. It will require fiscal action through spending cuts and tax hikes in order to eradicate it.’ She added that ‘the best position the government can take is to pre-empt deeper questions in the market about debt sustainability’, allowing it to spread the cost of fiscal tightening over a longer period.
Komileva also said that the possibility of a credit downgrade would not go away after the election, whichever party came to power, but a hung Parliament presented an even bigger risk. Political differences in how to cut public spending and raise taxes could ‘become more deeply entrenched, which could stand in the way of rapid intervention’, she warned.
