Why Fitch downgraded Britain from AAA, in three graphs

Fitch has today followed Moody’s in downgrading Britain from AAA to AA+. The reason? George Osborne is borrowing far too much.  In its verdict, it said that gross debt “will peak at 101% of GDP in 2015-16…and will only gradually decline from 2017-18.” The Chancellor, of course, had once set a rule to “ensure that debt is falling as a percentage of GDP by 2015”. This has been abandoned, and the downgrades are the consequence. Fitch doesn’t break down its forecasts, but it’s likely they follow those made by Michael Saunders at Citi:-                       For all Labour’s talk of austerity, George Osborne is borrowing more over five years than Labour did over 13 years. The Reinhart and Rogoff row is of limited relevance to Britain because as the above graph shows no one in the coalition is too worried about breaching a gross debt limit of 90pc of GDP. As Fitch says, Britain is heading for 101pc. The political debate has become detached from the economic reality and the credit rating agencies are focused on the latter. They look at the above graph and think: if UK debt hits 100pc of GDP, what will happen if there’s another crisis? Over to the Fitch verdict again:-

Failure to stabilise debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the UK’s strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a ‘AAA’ rating.

Fitch had been happy with Osborne’s original deficit reduction plan. But the Chancellor has not stuck to it. Faced with a choice between more cuts or more debt, he has gone for more debt every time. Fitch says:-

The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilised and reduced over the medium term.

 The deficit is stubbornly high, of course, because growth is so weak. Fitch spells this out:-

“The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.”

This has never happened before in Britain. Here is the grim historical perspective:- Update: Here is an excellent, though misguided, critique of Fitch from the left.