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24 March 2011

Is Britain really out of the “danger zone”?

Ratings agencies warn that slower growth could put Britain’s AAA rating at risk.

By George Eaton

George Osborne made a bold attempt to move from the rhetoric of rescue to the rhetoric of recovery yesterday. But while he’s been cheered this morning by the news that Martin Sorrell is planning to return his WPP agency to the UK from Ireland, Moody’s has sounded a discordant note.

In response to the news that growth has been downgraded and that borrowing will be £44.5bn higher than expected, the ratings agency has warned that Britain could lose its AAA credit rating. It said:

[W]e believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating.

Should growth be slower than expected (and there’s every possibility it will be), the UK could be, in Osborne’s own words, back in the “danger zone”. The National Institute of Economic and Social Research has rejected the Office for Budget Responsibility’s forecasts for growth (1.7 per cent in 2011 and 2.5 per cent in 2012) as over-optimistic and instead predicts growth of just 1.5 per cent this year and 1.8 per cent in 2012.

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The toxic combination of stagnant growth and rampant inflation (pushing up the cost of index-linked gilts) means that public spending will now be higher than previously thought. Total expenditure in 2015-2016 will now be £763.8bn rather than the £752.9bn forecast in November. The result is that the national debt will not be reduced as fast as Osborne hoped.

Fitch has warned this morning that “additional measures” may be required if the recovery is even weaker than expected. In other words, Osborne could have to announce further tax rises and/or spending cuts.

Of course, these are the same agencies that lined up behind the coalition’s plan to eliminate the structural deficit within one parliament. Their complaint is that the cuts are too small rather than too large. But it’s a sign that Osborne could yet fail on his own terms.