Britain’s government pledged on Tuesday to slash spending faster as a leading ratings agency warned that the country faces a “formidable” fiscal challenge and must bring forward public sector cuts to keep its top credit rating.
Chancellor of the Exchequer George Osborne told lawmakers that he was determined to mute any doubts about Britain’s creditworthiness.
“With people around the world looking at sovereign credit risks, the budget will quicken the reduction of the UK’s structural deficit before those eyes turn on Britain,” he said.
Britain’s budget deficit is forecast to reach 10.4 percent of GDP this year, while debt as a percentage of GDP was 62 percent in the 2009-2010 fiscal year.
Investors have been paying close attention to debt accumulated by sovereign states since Greece came close to defaulting on its obligations last month. Osborne’s announcement of a public spending review came only hours after Fitch Ratings agency released a special report that flagged the dangers facing Britain.
Fitch said that that the rise in public debt ratios in Britain since 2008 is faster than any other AAA-rated country, adding that the primary deficit is almost twice as large as during previous economic downturns in the 1970s and early 1990s.
“The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium term consolidation strategy,” the report said.
British Prime Minister David Cameron’s coalition government has made tackling the deficit its priority. Cameron talked tough on Monday, warning that the finances were worse than he had anticipated, noting that annual interest payments alone would rise to about £70 billion (US$101 billion) a year, from £42 billion currently, within five years if action is not taken.
Fitch applauded Cameron for acting “very quickly” on fiscal consolidation after he announced £6 billion of spending cuts, equating to about 0.4 percent of GDP, immediately after taking office in May, but it stressed that the coalition government’s emergency budget on June 22 must set out a more aggressive program than the targets set out in the previous government’s April budget to reduce the deficit to 8.5 percent of GDP in 2011-2012 and to 5.2 percent in 2013-2014.
The report pointed to austerity measures adopted in other European countries and increasing concern about sovereign risk in developed countries.
“Both the size of the deficit currently projected for 2011 and the failure to reduce the deficit to 3 percent of GDP within five years are striking,” Fitch said in its report. “A more ambitious deficit-reduction path — with borrowing 1 percent lower than in budget 2010 through the medium term — would result in an earlier peak in the debt/GDP ratio and a clearly declining debt path within the medium-term horizon, helping to go some way to restoring fiscal space, or a cushion against further shocks.”
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