George Osborne’s dreadful week was capped off tonight when a second credit rating agency stripped the UK of its AAA rating. Fitch downgraded Britain one notch from AAA to AA+, citing a “weaker economic and fiscal outlook”. The news came as a body blow to the Chancellor, who asked to be judged on his success in defending Britain’s gold-plated credit rating when he took office in 2010.
Earlier this week the International Monetary Fund downgraded the UK’s growth forecast for 2013 and 2014 more than any other advanced economy. And in a political embarrassment for Mr Osborne the Fund also advised the Chancellor to consider slowing the pace of his spending cuts, a course that has long been urged by the Labour Party.
Explaining its decision to downgrade, Fitch said it had acted because it now expects Britain’s gross national debt to peak at above 100 per cent of GDP in 2015-16 and not to start declining until 2017-18. In his Autumn Statement last year Mr Osborne abandoned the second part of his self-imposed fiscal mandate, which was to put the national debt on a falling trajectory by the end of the Parliament.
Fitch becomes the second of the major credit rating agencies to strip Britain of its top rank, following Moody’s' downgrade in February. The third big agency, Standard & Poor’s,reaffirmed Britain’s AAA earlier this month, but warned that there remains a one in three chance that it could downgrade.
Next week could bring more pressure on Mr Osborne to adopt an economic “Plan B”. The Office for National Statistics is due to reveal whether or not the UK economy slipped into a triple dip recession earlier this year when it reveals its estimate for growth in the first quarter of 2013. The statistics agency will also release the public finance figures for the final month of the 2012-13 year, which will show whether or not the budget deficit is rising once again under Mr Osborne’s watch.
Since Mr Osborne’s first budget in June 2010, in which he ratcheted up the deficit reduction plans he inherited from the previous Labour government, the UK economy has barely grown. The Treasury’s official forecaster, the Office for Budget Responsibility, now does not expect the UK economy to make up the ground lost in the deep 2008-09 recession until 2015.
Despite the downgrade, Fitch said in its statement last night that the UK retained an “extremely strong credit profile”. Responding to the statement, the shadow Chancellor, Ed Balls, said: “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.”