'Formidable' challenge facing Osborne pushes pound to lows

A warning from the Fitch ratings agency that Britain faces a "formidable" challenge to bring its public finances under control sent the pound and shares plummeting yesterday. The FTSE 100 index dipped briefly below the 5,000 mark and sterling shed 1 per cent of its value against the euro, a remarkable one-day fall.

While Fitch dropped no hint that it would alter its AAA credit rating for the UK, the scale of the task facing the Government was underlined in a report that gave little comfort to investors: "The scale of the UK's fiscal challenge is formidable and warrants a strong medium-term consolidation strategy – including a faster pace of deficit reduction than set out in the March 2010 Budget."

The warnings came as the Chancellor, George Osborne, outlined plans for how he will conduct his "once-in-a-generation" cuts to public spending. Two weeks before the emergency Budget, the Prime Minister has also come under pressure to resist EU "surveillance" over UK budget plans.

Fitch says that the existing plans, delivered by Alistair Darling in his last Budget in March, "render the UK vulnerable to adverse economic and financial shocks". The agency is also critical of the projections made for growth in the last Labour Budget, pointing out that they are "above consensus and arguably optimistic". The new independent Office for Budget Responsibility is due to present fresh forecasts for GDP growth on Monday.

The OBR is widely thought to be ready to downgrade Mr Darling's forecast of 3.25 per cent growth in 2011 to something closer to 2 per cent. Such a move would make even more urgent the need for cuts in public spending, as a smaller figure GDP implies a higher deficit in relation to that GDP. On current Treasury forecasts the deficit will reach 11.1 per cent this year, falling to 8.5 per cent next.

The current debate about fiscal retrenchment is unsettling markets and investor confidence. While the UK gilts market has generally benefited from the flight of funds from the troubled eurozone, a record sale of government securities to the Bank of England yesterday was taken by some observers to indicate a reduction in investor appetite for UK government paper.

It is part of a picture of gradually rising financial stress. This week the key three-month Libor rate for sterling hit a 10-month high, and euro borrowing rates rose on fears about contagion spreading from the eurozone to the UK via the banking system, and a second credit crunch. News about renewed problems in Hungary and Spanish workers' resistance to spending cuts have also added to the tensions.

Safeguards agreed by the UK in international forums such as the G20 on easing market fears through international mutual scrutiny of budget plans are now the subject of Tory disquiet.

Yesterday the EU's commissioner on economic and monetary affairs, Olli Rehn, said he expects the EU's 27 finance ministers to move "fast forward on reinforcing economical governance". The EU's president, Herman Van Rompuy, said most countries had agreed on more sanctions at talks on Monday, though the details still need to be finalised: "A government presenting a budget plan with a high deficit would have to justify itself in front of its peers, among finance ministers."

At a summit next week, EU leaders will be asked to take advice from the European Commission on their Budgets before putting these to the national parliaments, to identify overly optimistic growth or revenue assumptions.

Although this is very much in line with the thinking of the coalition, Tory backbenchers seem certain to urge Mr Cameron to resist such moves.

A British spokesman commented: "The UK would not be prepared to submit draft Budgets to the European Commission or peer review before putting them to Parliament. We will not support measures that undermine the role of Parliament."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific