Credit rating agency Standard & Poor’s gave Gordon Brown another headache yesterday by revising its outlook on the UK’s AAA-credit rating from ‘stable’ to ‘negative’ – and warning that a downgrade might follow unless the Government starts getting a handle on the spiralling budget deficit. The notion that the UK’s public finances are in a right royal mess is not terribly controversial. But it’s worth remembering that this warning comes from one of the agencies whose systematic failure to value sub-prime mortgages correctly is one of the major reasons why we’re in this mess…
S&P’s move came after the Official for National Statistics revealed that Britain’s budget deficit jumped to £8.5bn in April, the highest since records began (and four times as much as we borrowed this time last year). Although we get to keep our gold-plated AAA-rating for now, S&P has switched its outlook to negative for the first time in decades – which statistically means there’s a one in three chance that we could end up losing our impeccable credit rating. Current Government estimates suggest that public debt, currently at about 55% of GDP, will peak at about 79% - coincidentally just below the level that would normally trigger a downgrade. But S&P doesn’t agree: it thinks our debts could reach a 100% of GDP, which isn't very AAA. And a downgrade would make it much more expensive for the Government to borrow all this money.
Of course, S&P and the like haven’t exactly covered themselves in glory lately. These ratings agencies managed to assign AAA-ratings to various packages of sub-prime mortgage loans, with a little encouragement from their chums at the banks, which has seriously dented their credibility (let’s just hope they’re not being similarly over-optimistic on this occasion, or we really should start panicking). So you might wonder why we should take their word for it this time round. It’s a bit like the ONS asking us to get excited about higher retail spending, a month after admitting their methodology was rubbish (oh wait, that happened too).
Then again, spotting the gigantic hole in the UK’s public finances is probably a bit more straightforward than valuing a load of US trailer parks. And the bad news is that our fate (as a creditor) depends largely on whether the Government can come up with a plausible plan for get the books in order. Since a deeply unpopular Government is not very likely to announce the big tax hikes and swingeing cuts this will require, we probably shouldn’t expect that to happen until after the election - which Brown and co will presumably leave as late as possible. So by the time the next lot get in, things really could be in a mess.
In today's bulletin:
Fasten your seatbelts - BA nosedives to record loss
Non-Standard and Poor outlook for UK economy
Editor's blog: Why this new Puritanism is pointless
Why green shoots lead to recovery
Resigning in style, with YouTube