S&P affirms UK's AAA credit rating, outlook stable

Washington: Standard & Poor’s reaffirmed Britain’s top-notch AAA credit rating on Friday, in a boost for the coalition government after warnings from other ratings agencies and weeks of criticism for unpopular tax measures in its 2012 budget.

The agency said the rating outlook was stable, reflecting its “expectation that the government will continue to consolidate public finances”, even though it only expects the economy to grow about 1.6 percent each year until the next election in 2015.

“We believe the UK government maintains a strong commitment to implementing its fiscal mandate, and has the ability and willingness to respond rapidly to economic challenges,” the agency said.

The Conservative-Liberal Democrat coalition government has extended its austerity programme to seven years from five because economic growth has not turned out as strong as it expected when it came to power in 2010.

Both the Fitch and Moody’s ratings agencies have placed Britain’s top credit rating on a “negative” outlook, warning Britain could potentially lose a prized AAA status which the government promised to safeguard as a top policy priority.

OSBORNE WELCOMES DECISION

S&P said its rating for Britain could come under pressure if the pace of austerity or economic growth slowed further or if doubts grew about the government’s desire or ability to see through cuts in public spending.

“This is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times,” said British finance minister George Osborne.

“The budget showed we are ready to go on making the difficult decisions that are keeping our country safe. Once again we are reminded that those who want to spend and borrow even more would lead our country into an economic catastrophe.”

Osborne has come under fire from across the political spectrum for cutting the top rate of income tax for high earners in his March 21 budget, while withdrawing tax breaks for the elderly and ramping up taxes on cheap, hot food snacks.

“Osborne will undoubtedly be hugely relieved by S&P’s decision and will point to it as providing important support for the overall stance taken in his March budget, which has come under significant criticism for appearing to help millionaires while hitting pensioners and taxing hot pasties,” said Howard Archer, an economist at Global Insight.

“We believe that the UK is more likely than not to be able to retain its AAA rating.”

To achieve its own economic goals, the government needs to get its debt falling as a percentage of national output by 2015/16.

S&P said it expected net public debt to stabilize at just under 90 percent of output by 2014, before declining, adding that the “economic recovery will gain traction over the medium term.”

While it said belt-tightening efforts would “likely drag on economic growth,” it said the British economy’s ability to absorb these shocks has improved, thanks in part to a large bond market and debt funded entirely in the domestic currency.

However, it also predicted lower tax revenues than official British estimates “which could put pressure on public finances”.

Reuters