Fitch: Budget boost to UK's AAA credit rating

The UK's gold-plated AAA credit rating received a major boost today after ratings agency Fitch said Chancellor George Osborne's Budget would "materially strengthen confidence" in the nation's public finances.

Fitch said the Budget - which will claw back £120 billion in tax hikes and spending cuts over the next five years - was a "strong statement of intent".

The firm's head of sovereign ratings, David Riley, said: "Fitch's preliminary assessment of today's Budget is that it sets out an ambitious deficit reduction path that, if delivered upon, will materially strengthen confidence in UK public finances and its 'AAA' status."

Fitch said the harsh measures unveiled by the Chancellor - including £11 billion in welfare savings, a two-year public sector pay freeze and a hike in VAT to 20% - were "substantial and enhance confidence in the outlook for UK public finances".

It said the deficit reduction was "materially stronger" than in Labour's last Budget in March, although it warned that October's comprehensive spending review would be critical in spelling out fuller details of the cuts.

Mr Osborne said borrowing would fall from 10.1% of GDP this year to just 1.1% in 2015-16, while the underlying current Budget deficit would move into surplus by 2014/15 - a year earlier than planned.

But the independent Office for Budget Responsibility (OBR) lowered its growth forecasts - prompting fears in some quarters over a double-dip recession.

The OBR last week forecast 1.3% and 2.6% growth for 2010 and 2011 in its initial pre-Budget estimates - but today the body predicted 1.2% growth for this year and 2.3% in 2011, with growth unchanged at 2.8% in 2012.

Capital Economics chief European economist Jonathan Loynes said the forecasts looked "pretty optimistic to us, given the likely impact of the fiscal squeeze itself".

And KPMG chief economist Andrew Smith described Mr Osborne's tough measures as "a kill or cure" Budget, adding: "The aim is to eliminate the structural deficit over this parliament, but it risks choking off the recovery.

"There is no guarantee that private demand will rebound just because the Government retrenches. The deficit is large because private demand is weak, not the other way round.

Meanwhile interest rates could be held at their current record low of 0.5% until 2012 as a result of the fiscal squeeze, according to Douglas McWilliams, the chief executive of the Centre for Economics and Business Research

He said the UK should avoid sliding back into recession but added: "We see little growth in consumer spending in the next two years and think that it will be 2013 before we start to see a sustained export and investment boom."

The Chancellor's clampdown comes amid a still-fragile economic recovery after the deepest and longest UK recession since official records began. The economy finally returned to growth in the last three months of 2009 but growth slowed to just 0.3% in the opening three months of this year.

Public borrowing will also be lower than previously forecast in the current financial year at £149bn thanks to Mr Osborne's "unavoidable" cuts - falling to just £37 billion by 2014/15.

The Chancellor, who wants to make 77% of the savings through spending cuts and 23% through tax rises, said the Government's "formal mandate" was to balance the UK's structural current deficit as well as cutting debt as a share of GDP by 2015/16.

The OBR says the Government is on course to meet both targets a year early as a result of the measures unveiled but Mr Smith added: "If growth fails to meet the forecasts, all bets are off on the public finances as well."