The UK could lose its coveted AAA credit rating if “poor policy making” continues to drag on growth, according to GLG UK Select fund manager John White.
White claims the country could be downgraded by one or two notches by the major credit ratings agencies if the government fails to bolster VAT and income tax receipts and public spending remains high as a share of GDP.
“The UK economy in our view is about to enter an extreme period of contraction as a result of poor policy making since the banks were recapitalised in early 2009,” the manager writes in the £275.7m fund’s latest factsheet.
“For the authorities to now accept that we should pursue a pro-growth strategy is indeed too late because consumer behaviour has become ingrained and a new era of caution and austerity has been born.”
White adds that it is “now too late” for the UK economy as tighter regulation and new legislation – especially measures targeted at the financial services industry – are acting as a constraint on growth.
“We have killed the golden goose that has been the heartbeat of the economy for many years as we seek to shrink the financial services industry to fraction of its previous size whilst expecting tax receipts to remain unaffected,” he says.
The UK will also lose its safe haven status if it is stripped of itsAAA rating, the manager notes, which would place gilts and sterling under pressure as the confidence of international investors in the country declines.
Both Moody’s Investors Service and Fitch Ratings currently have the UK on a negative outlook, meaning the country is at risk of a downgrade in the coming years if the government fails to contain debt within reasonable levels.
However, Standard & Poor’s – the other major agency – reaffirmed the country at AAA in April without warning of a possible downgrade.
The group said at the time: “In our view, the UK has a wealthy, open, and diversified economy, supported by a well-established political system and macroeconomic policy framework, which can react quickly to economic challenges.”