Fitch forecasts that UK's net public debt will peak at 78% of GDP in 2014-15, and that this may force Fitch to reconsider the UK's AAA rating status.
We have no complaints with this analysis, but is it just us, or are we missing something. Did the US not just pass 100% of debt to GDP...already!?! And yet the US is still rated triple A by Fitch.
From Fitch:
As with some other major 'AAA'-rated sovereigns, unless off-setting measures were adopted, the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted.
Full Release:
Fitch Ratings-London-29 November 2011: Fitch Ratings says the Autumn Statement and the updated fiscal and economic projections from the Office of Budget Responsibility (OBR) confirm the scale of the budgetary challenge facing the United Kingdom ('AAA'/Stable Outlook). The revised fiscal projections signal a significant deterioration relative to the March 2011 assessment by the OBR.
The sharp downward revisions to the OBR's assessment of the near-term outlook has brought them in line with consensus and Fitch's own forecasts of growth of just 0.7% in 2012 before rising to 2.1% in 2013. However, the OBR has effectively lowered its estimate of the size of the UK economy by the end of the period 2015-16 by around 3.5 percentage points. Consequently, the UK government's goal of eliminating the underlying structural budget deficit is now projected by the OBR to be met in 2016-17, in line with the government's rolling mandate, rather than its previous estimate of 2014-15.
The UK government has responded to the deterioration in the economic and fiscal outlook with additional measures with reductions to current spending amounting to GBP15bn by 2016-17 which over the remainder of the current parliament is used to fund temporarily higher capital spending. Subsequently, the savings on current spending feed through to a significant fiscal tightening in the first years of the following parliament.
Fitch's initial assessment is that the policy response does demonstrate a continuing commitment to placing UK public finances on a sustainable path, and the adoption of more realistic economic forecasts enhances the credibility of the consolidation effort, while the important target of reducing the public debt burden from 2015-2016 remains intact. However, the deterioration in the economic and fiscal outlook implies that net public sector debt will peak at 78% of GDP compared to the previous OBR forecast of 70% in 2014-15. On a broader measure of government debt used by Fitch in international comparisons, the UK government will become the most indebted of any 'AAA'-rated sovereign with the exception of the US ('AAA'/Negative Outlook). UK government debt is on this measure projected by the OBR to peak at 94% of GDP and compares with Fitch projections for Germany and France of 83% and 92% respectively.
As with some other major 'AAA'-rated sovereigns, unless off-setting measures were adopted, the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its 'AAA' status has largely been exhausted.
