United Kingdom’s Chancellor of the Exchequer George Osborne, said he would not give in to opposition calls to change his economic policy after Moody’s Investors Service’s decision to strip the UK of its Aaa status.
Osborne said the government should “stick to its course” to reduce Britain’s debt after the opposition Labour Party called on him to switch his emphasis from deficit reduction to growth, following what it called Moody’s “humiliating” decision.
Reuters reported that Osborne was backed by former Conservative Chancellor Ken Clarke and Business Secretary Vince Cable, who downplayed the significance of the Moody’s announcement
Osborne has repeatedly referred to retaining the top rating as a test for his economic policy and the UK’s political classes are sparring over the downgrade even as investors and economists say rating changes are a poor indicator of fiscal health.
US and French gilt yields are lower than where they were when they were downgraded over the past two years.
“Britain has a debt problem, built up over many years, and we have got to deal with it,” Osborne wrote in an article in the Sun newspaper. “Far from weakening our resolve to deliver our economic recovery plan, this rating decision redoubles it.”
The UK’s high and rising debt burden means deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement which accompanied the downgrade announcement.
While the UK retains “considerable structural economic strengths,” expected slow growth of the global economy and the reduced speed of debt reduction in the country led to the decision, the company said.
Still, the “downgrade is all in the price and I don’t think it came as a total surprise to the market,” Shahid Ikram, head of sovereigns and chief investment officer for the UK at Aviva Investors, said in a phone interview.
“The impact on gilts will be limited in the same way ratings downgrades had limited impact on the U.S. and France.”
Labour’s economy spokesman, Mr. Ed Balls, said Osborne should scale back his fiscal squeeze and refocus on growth in his budget on March 20. The UK economy shrank by 0.3 per cent in the fourth quarter of last year from the prior three-month period, leaving the country on the brink of an unprecedented triple-dip recession.
“Moody’s themselves say the main driver of their decision is the weak growth in Britain’s economy,” Balls said in a statement. “In the budget, the government must urgently take action to kick-start our flat-lining economy and realise that we need growth to get the deficit down.”
Osborne said in his autumn statement December 5 that he’s no longer likely to meet his target to begin cutting the burden of government debt in 2015-16 after his fiscal watchdog cut its growth forecasts. Standard & Poor’s put the UK’s rating on a negative outlook a week later.
Britain’s debt as a percentage of gross domestic product will climb to 98 per cent next year from 90 percent last year and 95.4 per cent in 2013, the European Commission said in its winter forecast on February 22.