By Richard Johnstone | 19 April 2013
Fitch has become the second large ratings agency to strip the UK of its triple-A credit rating.
The move follows Moody’s downgrade in February. Fitch has had the UK’s rating on negative watch since March 14 last year. Its report, published today, said that projections for higher budget deficits and government debt in the medium term had led to the downgrade to AA+.
Today’s update forecasts that total government debt will peak at 101% of gross domestic product in 2015/16, and will only gradually decline from 2017/18. This compares with Fitch's previous projection for debt to peak at 97%, and decline from 2016/17. The median debt-to-GDP ratio for triple-A rated nations is around 50%.
The firm has previously warned that failure to stabilise debt over the medium term would likely trigger a rating downgrade. ‘The fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a AAA rating,’ today’s report concluded.
Fitch has also revised down its forecast economic growth for 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% last September. The UK economy is not expected to return to the level of economic output before the financial crisis until 2014.
Although the report praised the government’s ‘significant progress’ in reducing public sector net borrowing, it remains at 7.4%, and is not expected to fall below 6% of GDP before the end of the current Parliament in 2015. This means that the next government will be required to implement substantial spending reductions, tax rises or both, if public sector debt is to reduced over the medium term.
The report said tthe outlook for the lower rating was now stable, but warned that a further downgrade could be possible if the government debt-to-GDP ratio failed to stabilise.
However, a relatively robust economic recovery could lead to the triple-A rating being restored, it added, as could faster-than-expected deficit reduction.
Responding to the announcement, a Treasury spokesman said: 'This is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade.
'Fitch themselves say the government's "continued policy commitment to reducing the underlying budget deficit" is one of the main reasons UK debt now has a "stable" outlook.'
Shadow chancellor Ed Balls said that the downgrade was ‘another humiliating blow’ to the government, which had put maintaining the country’s AAA rating as a key measure of their deficit reduction plan.
He added: ‘It’s not the views of the credit rating agencies, but the economic realities they are responding to which should be ringing alarm bells at the Treasury. Fitch is clear that their decision is a result of the weak growth performance of the UK in recent years. They are responding to nearly three years of stagnation, rising unemployment and billions more borrowing to pay for this economic failure.
‘This downgraded chancellor needs to wake up and realise that his failing economic policies are causing long-term damage and Britain’s families and businesses are paying the price.’
