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Why Fitch downgraded Britain from AAA, in three graphs

19 April 2013

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:-

Screen Shot 2013-04-19 at 18.02.09






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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.

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 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:-

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UpdateHere is an excellent, though misguided, critique of Fitch from the left.

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Show comments

    I understand that there will be an uptick in N Sea oil & gas from March (as opposed to last few months when there has been a lot of maintenance).
    For long term there are more exploitable reserves in N Sea than previously thought & energy companies can make major progress in a surprisingly short period of time.

    • petermorris

      The wholesale price of energy appears to be falling too, so not all that good news.

  • Walter Ellis

    Call me old-fashioned, but the standard UK contraction for “paragraph” is “par”
    or “para”. Graph is American. Just because Fitch has downgraded the British economy doesn’t mean the the Speccie has to outsource the language.

  • Rockin Ron

    The deadly dance continues and no politician in this country, Europe or the USA has the answer to this condundrum: Is economic growth being stifled by austerity or will the recession be even more prolonged by looser public expenditure policy? In other words, by tackling the lack of growth through austerity measures, are we making the return of economic growth even less likely or if there were fewer austerity measures would that drive growth, rather than inflation?

    Mr. Osborne has to keep markets satisfied to show that he can be relied upon to follow through on tough spending policies but he also has to give confidence to wealth creators that there is a favourable regime for them. A tough one and so far, Osborne has misjudged it to say the least by talking tough but spending more freely than Darling would have done. However, he had little choice because the downturn is so entrenched. No answers here, only more economic pain, but he could:

    – reduce VAT to 15%
    – have a raid on banks’ profits
    – have a round of privatisations of national industries (are there any still left)
    – have a mansion tax
    – follow through on making work pay
    – speed up the introduction of the single benefits payment system
    – extend the maturity date of government bonds by purchasing them through more QE
    – have a one off rebate for energy consumers (i.e everyone) financed by a special one off levy on utility company profits. That will get money circulating through increased consumer spending and boost confidence.
    – pay down the deficit faster by increasing the amount of tax collected from corporates.

    A mix of demand and supply side measures, but ACTION is needed fast. Any other constuctive thoughts on what the Chancellor could do?

    • berosos_bubos

      He needs to cut income tax. If he can’t ‘afford’ to do that then he needs to make public sector cuts in order for him to do so. That is the only way. One off levies on the private sector are devastating to investment confidence. The BOE needs to unwind and interest rates need to rise as is soon as is praticable; a return to sound money. The banks must not be made to increase their liquidity levels at a time when they need to lend more.

  • HookesLaw

    Its fatuous to say that Osborne is borrowing more when when the deficit he inherited was 160 billion in one year and the economy had shrunk by 7%.

    If the govt is still spending then how can we also have austerity? Critics need to make their minds up.

    • Daniel Maris

      The government could still be spending if it was spending one pound. What are you on about?

  • alabenn

    More meaningless graphs, what does it matter if you go bust, 90% or 100% of nothing still adds up to nothing no matter which way you cut the cake.
    The current madness of pretending that you can shuffle these figures to not only put off the day of reckoning, but actually avoid it altogether is fantasy, a bit like the forecasts in these worthless charts.
    You balance the books or go bust and time is something else that is not in surplus.

  • the viceroy’s gin

    It would be funny if the Millipedes began trumpeting Darling’s original plans, as their way forward: “Throw Dave out, and we’ll bring you what was needed all along, just like we planned!”

    Curve No. 2 shows Darling’s original debt reduction plan as superior to Dave’s performance to date and plan.

    Curve No. 3 shows the economy was growing until Dave took over.

    I’d like to see Curve No. 1 with Darling’s original numbers included, for comparison.

    I’m seeing this shaping as a fairly easy election cycle for the Millipedes. The Cameroons are giving it up sweet.

  • Makroon

    We have a bank governor who has been talking down the economy for ever.
    Now, the “new Canadian hope” has started following suit, by mouthing off about our “crisis economy”, before he’s even got his feet under the table – probably to make him look good when things turn out to be not as bad as all that.
    Then we have the French cabal at the IMF, now that Osborne has not given them the £20B that they were hoping for, to help bale out the Eurozone, suddenly turning against “austerity”.
    To avoid confusion, that’s not Eurozone/French type austerity which has wrecked economies and impoverished people across Europe, just the Anglo mild version.
    I see our bond yield is at a low of 1.67% today.
    I don’t think the “downgrade” has anything to do with your graphs Mr Nelson, but any excuse for another PP presento eh ?

  • foxoles

    Osborne’s new carbon floor price tax starts at £16 per tonne of carbon emitted this year, rising to £30 by 2020.

    EU companies will pay more like 3 euros a tonne for the next seven years.

    He has just made our energy five times as expensive, with a promise of ten times by 2020.

    No wonder we’ve been downgraded.

  • telemachus

    “will peak at 101% of GDP in 2015-16…and will only gradually decline from 2017-18.”
    I do not see anyone addressing how it can possibly decline gradually or not if we are not growing
    And we are not

    • The Sage

      If we are not cutting unnecessary and wasteful expenditure more like. And poor old George is too frit to cut anything. Where’s Geoffrey Howe when we need him?

      • telemachus

        Both are surely necessary
        Too frit for one and unable to understand how to do the other

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