Chancellor of the Exchequer George Osborne defended his handling of the economy on Thursday after Fitch warned that his latest budget had sparked questions over the nation’s top AAA credit rating.
Osborne said in his budget update on Wednesday that the government would fail to meet its official target for reducing public debt as a proportion of economic output by 2015-16.
The population will now suffer austerity until 2018 — three years later than initially planned — as a result of gloomy downgrades to official economic growth forecasts from the Office for Budget Responsibility fiscal watchdog.
Later on Thursday, the Bank of England will announce its latest monetary policy decisions, one day after the OBR slashed its growth forecasts for every year until 2017 — and predicted a 0.1-percent contraction for 2012.
The budget downgrades prompted Fitch to warn that the failure to meet the debt reduction target hurt the “credibility” of Britain’s cherished AAA rating.
Questioned about the potential loss of the top credit assessment, Osborne told BBC television:
“It wouldn’t be a good thing, but the credit rating is one of a number of ways which people look at countries.
“Another test which is how much will people pay to borrow money and how much people are being paid to borrow money, what is the interest rate that the country needs to charge to get people lending money.”
The chancellor added that Britain was still regarded as a good place to invest in the bond market.
“We are borrowing money at the moment at some of the lowest interest rates in British history because when people look around the world, look at the countries to invest in, they think Britain is a good investment,” he added.
“The credit rating is important and the market is important. One of thing we’ve been able to do with this the government is keep (bond) rates very very low, because the world has confidence in us.”
Fitch, which placed Britain’s AAA rating on negative outlook in March, said late on Wednesday that it would conduct a formal review of the rating in 2013 after the next annual budget due in March.
And the agency noted that Wednesday’s budget update showed “the scale of the multi-year fiscal consolidation challenge facing the UK.”
Fitch added in a statement: “The government has chosen not to chase the (debt reduction) target by deploying additional consolidation measures over the next two years.
“In our view, missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the rating.
“We forecast gross general government debt to peak at 97-percent in 2015-2016, approaching the upper limit of the level consistent with the UK retaining its ‘AAA’ status,” Fitch said.
Britain’s Conservative-Liberal Democrat coalition government, which rose to power in 2010, has since sought to slash a record deficit inherited from the previous Labour government.
Osborne added on Thursday: “Two years ago when this government came into office, there was an imminent danger that Britain was not only to lose its credit rating but loose all credibility in the world’s markets.
“We had the same (bond) interest rates as Spain at the end of the last Labour government.
“Things have changed a lot with this government we’ve got those interest rates down.”
Osborne defends economy policy after credit warning
