Fraser Nelson

Downgraded finances

Downgraded finances
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Standard & Poor has just become the first credit rating agency to downgrade the UK from a "stable" assessment to "negative" - and given that the Tory borrowing proposals until 2014 are virtually identical to Labour's, it is a warning that should chill Cameron. It's feasible to fund your government with IOU notes now, with the Bank of England printing money to buy them, and a global flight-to-safety making a bull market in bonds. But after the next election, with equity markets recovering and the QE policy exhausted, how will Cameron find buyers for the £150bn a year debt he currently envisages issuing?

The S&P note is not public, but I reprint here what it has told clients. Note it has not altered its AAA status, just its rhetotic and overall position. I'd be very intertested, as always, in what CoffeeHousers make of it:  

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term," “Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of GBP100 billion-GBP145 billion, or 7%-10% of 2009 estimated GDP.” “However, the parties' intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.”     

Crucially, S&P warns that it will take away the AAA rating if someone - and it will be Cameron - doesn't put the UK on a path of debt reduction. Remember, even with the 2.4pc year-on-year cuts hidden in Budget 09 from 2011 on, there are no plans to reduce debt. What S&P is asking for is far sharper, far deeper cuts. Here, in its own words:

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term."

This kind of thing makes it abundantly clear how damaging the current political paralysis is.

Written byFraser Nelson

Fraser Nelson is the editor of The Spectator. He is also a columnist with The Daily Telegraph, a member of the advisory board of the Centre for Social Justice and the Centre for Policy Studies.

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