The ratings agency Moody’s has threatened to downgrade the UK due to its low growth and weaker than expected budget cuts, according to The Telegraph.
Moody’s says that even though the country has instituted a serious program of economic reforms that have cut government expenditures, its Aaa rating is still at risk over low growth.
If the UK isn’t growing fast enough, its tax revenues aren’t either. So even if the government is cutting spending, it’s still not able to fund the government’s budget to a greater degree, nor pay down its long-term debt.
Moody’s, from The Telegraph:
Although the weaker economic growth prospects in 2011 and 2012 do not directly cast doubt on the UK’s sovereign rating level, we 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.
Spending is actually going to be higher in 2012 than anticipated and, as such, the UK’s deficit will too be higher.
More on the deficit’s expansion, from Morgan Stanley’s Melanie Baker and Cath Sleeman:
Larger deficits and so slower pace of fiscal consolidation: The deficit forecasts published today in the Budget were both worse than we had expected and worse than the OBR’s previous forecasts in November. That implies more gilt issuance than expected in coming years (see page 7) and a higher debt burden.
There is some ‘fiscal slippage’ in these forecasts in the sense that the deficit now declines at a somewhat slower rate than previously forecast. The 2011-12 deficit is £4bn higher than the OBR previously forecast, now 7.9% of GDP vs. 7.6% previously forecast. By the end of the parliament (2014-15) the deficit is £11bn higher than previously forecast (now 2.5% of GDP rather than 1.9%).
Note the rise in the deficit forecast for the next four years.
Photo: Morgan Stanley