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Fitch: UK deficit challenge ‘formidable’

Fitch Ratings has warned that the fiscal challenge faced by the UK is “formidable” and says a strong consolidation strategy is vital in retaining a AAA status.

In the run up to the June 22 emergency Budget, the ratings agency says the rise in public debt ratios since 2008 is faster than any other AAA rated sovereign and the balance adjustment required to stabilise debt is amongst the highest of advanced countries, meaning the Government must speed up deficit reduction plans.

Fitch says the primary deficit is nearly twice as large as that seen in previous episodes of fiscal deterioration in the UK in the 1970s and early 1990s.

It warns that the fiscal consolidation plans of the last Government, set out in the April 2010 Budget, were “un-ambitious” and were not articulated in detail, undermining their credibility.

While it applauds the new coalition for making an immediate £6bn spending cut, equivalent to 0.4 per cent of GDP, it warns that it is not obvious from current policy statements that the new Government will adopt lower deficit forecasts throughout the medium term.

It says: “A similar deficit reduction path to that set out in the April 2010 Budget, but based on more realistic growth assumptions might be viewed as more credible, it would still run the risk of leaving the UK as something of a standout relative to the deficit targets of other advanced country sovereigns.

“With other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3 per cent of GDP within five years are striking.”

Travelex says Sterling fell after Fitch’s assessment of the UK deficit today, down to $1.438. The FTSE also dipped below 5,000 this morning, but has rallied slightly to 5,027.

Travelex UK trading desk head Mark Bolsom says: “The gloomy outlook from Fitch is weighing heavily on sterling this morning and will have heightened investor fears of a debt downgrade to the UK sovereign debt rating.

“The fact that Fitch has felt the need to comment on the UK deficit again is an indication that they are still considering downgrading the UK’s sovereign debt rating. This will turn up the pressure on the new coalition Government.”

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