In his autumn statement to Parliament on Wednesday, Britain’s chancellor of the exchequer George Osborne announced that growth would be slower and borrowing higher than previously thought. Even if he insisted that the United Kingdom is “heading in the right direction,” the government missing its deficit and debt targets has some fearing that the country is in danger of losing its credit rating.
Osborne admitted that in his statement that it will take the government two years longer to close the budget deficit. The national debt as a percentage of gross domestic product won’t start to fall until the 2016-2017 financial year.
Fitch, one of the three mayor American credit rating agencies, announced that Britain’s credibility had been damaged by the new forecasts and it would review its appraisal of British creditworthiness early next year. It already has Britain’s AAA rating on a negative outlook.
A downgrade to AA would remove Britain from the small group of European countries that have their top rating through the financial crisis and put it on par with countries such as China, France and the United States. The damage may be more psychological as it would certainly harm Osborne’s reputation. Economically, Standard and Poor’s downgrade of American creditworthiness last year had no discernible effect. Rather, borrowing rates plummeted as investors grew more anxious about the sovereign debt crises in the eurozone.
Besides the chancellor, the coalition government would lose an awful lot of face if Britain’s debt is downgraded. In the last general election, the Conservative Party promised to keep the country’s AAA rating intact. While no further austerity measures were announced on Wednesday, Osborne may have little choice but to include deeper spending cuts in his March budget to protect Britain’s status.