Credit rating agency Moody’s have warned Britain that they could possibly lose their AAA status. This is the best possible rating and losing it will have major implications on the nations finances. This is the most serious challenge the Coalition have faced on their economy since they came into power.
The UK’s creditworthiness is now negative in the eyes of the rating agency, who have warned of the downgrade due to the implications of weak economic growth on the Coalition’s plans to lower the nation’s deficit.
Policies restricting growth
The agency have stated that the increased ‘risk of further shocks’ with the single currency region would end up costing Britain its AAA rating. This latest development will only fuel the political debate regarding economic policy, and it is expected that the Labour party will argue that the Coalition’s policies are restricting the economy.
However, Government ministers have argued that the warning from Moody’s only highlights the need for the Coalition to stay close to its plans to lower the deficit, and in turn bring the nation’s debts under better control.
Moody’s main expectation is that the Coalition Government will meet their target of dealing with the majority of the deficit by 2015/16, and then they will begin work on lowering the stock on Government debt.
The problem the Government has is that weak growth in the economy is creating doubts over whether these targets will be met. Worst of all is the fact that the Coalition, has a much lower capacity to cope with any new economic shocks without moving away from its original timetable.
The credit agency has set out three scenarios that would end in the loss of the AAA rating. The first is a combination of slow growth and lower political commitment to financial consolidation. Second is the quick increase in the rate that is paid on Government bond, which is due to a rise in inflation or a loss of confidence in the financial markets.
The last is a new banking crisis, this will bring about new Government bailouts for the financial sector.
The problem facing Britain is that its debt has passed the £1 trillion mark for the first time. This is being blamed on the unsustainable level of spending by the previous Labour Government. The £1 trillion figure has been the highest since records began 1993, and it represents 64% of GDP.
The Coalition have predicted that trying to solve Britain’s debt will cost £47.6bn this financial year, which will rise to £65.5bn by 2016/17.