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S&P downgrade Spain to BBB+

Austerity cannot save Spain from an expected contraction in 2012 and 2013, says the agency.

The credit ratings agency Standard and Poor's has downgraded Spanish sovereign debt, cutting it from A to BBB+. The country's outlook remains negative, indicating that the ratings agency expects the possibility of further trouble in the future.

The reason given was worse than expected economic contraction:

We have lowered our forecast for GDP to contract in real terms by 1.5 per cent in 2012 and 0.5 per cent for 2013. We had previously forecast real GDP growth of 0.3 per cent in 2012 and 1 per cent in 2013. . .

Following budgetary slippage of 2.5% of GDP in 2011 beyond the 6.0% target, the government has committed to a target of 5.3% of GDP in 2012 and 3.0% in 2013. In our opinion, these targets are currently unlikely to be met given the economic and financial environment.

In other words, S&P expect Spain to remain in recession throughout 2012 and 2013, and also think that the governing People's Party won't be able to enact their proposed austerity program.

The news is bad for the Spainish government, which has seen its bond yield rise to 6 per cent since the the downgrade was announced. If the nation really does return to recession and fail to cut spending as a result, that will be much more expensive as a result of this increased cost of borrowing.

But the news also hits hard at austerity advocates. Spain has been a poster child for fiscal responsibility, running a budget surplus before the financial crisis, and cutting its deficit from levels comparable with the UK and US in 2009 to far below in just two years, as this chart via Pawel Morski shows:

If textbook austerity cannot save Spain from being downgraded, then proponents of the ideology – who often point to the need to keep bond markets, and by extention ratings agencies, happy – may have to rethink their defence. Despite warning of a further downgrade if debt breaches 80 per cent of GDP, in their reasoning for this one, Standard and Poor's appear to be saying that growth matters more than fiscal responsiblity, because without the former, the latter cannot occur. While that is hardly a controversial claim, it comes from a surprising source, and it will be interesting to see their response the first time a nation takes them at their word.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Is anyone prepared to solve the NHS funding crisis?

As long as the political taboo on raising taxes endures, the service will be in financial peril. 

It has long been clear that the NHS is in financial ill-health. But today's figures, conveniently delayed until after the Conservative conference, are still stunningly bad. The service ran a deficit of £930m between April and June (greater than the £820m recorded for the whole of the 2014/15 financial year) and is on course for a shortfall of at least £2bn this year - its worst position for a generation. 

Though often described as having been shielded from austerity, owing to its ring-fenced budget, the NHS is enduring the toughest spending settlement in its history. Since 1950, health spending has grown at an average annual rate of 4 per cent, but over the last parliament it rose by just 0.5 per cent. An ageing population, rising treatment costs and the social care crisis all mean that the NHS has to run merely to stand still. The Tories have pledged to provide £10bn more for the service but this still leaves £20bn of efficiency savings required. 

Speculation is now turning to whether George Osborne will provide an emergency injection of funds in the Autumn Statement on 25 November. But the long-term question is whether anyone is prepared to offer a sustainable solution to the crisis. Health experts argue that only a rise in general taxation (income tax, VAT, national insurance), patient charges or a hypothecated "health tax" will secure the future of a universal, high-quality service. But the political taboo against increasing taxes on all but the richest means no politician has ventured into this territory. Shadow health secretary Heidi Alexander has today called for the government to "find money urgently to get through the coming winter months". But the bigger question is whether, under Jeremy Corbyn, Labour is prepared to go beyond sticking-plaster solutions. 

George Eaton is political editor of the New Statesman.