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UK Faces 'Formidable' Fiscal Challenge

by Amanda Banks, Tax-News.com, London

10 June 2010


The UK’s coveted AAA credit rating faces a downgrade should the government not take drastic enough measures to cut the budget deficit in the forthcoming emergency budget on June 22, Fitch Ratings has warned.

Having held out on introducing consolidation measures during the downturn, the UK faces a deficit of near 11% of gross domestic product in 2010. But in a stark warning, issued in a report dated June 8, Fitch Ratings warned that “the scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy.” The report goes on to note that the UK’s debt has grown faster than any of its AAA-rated peers.

While Standard and Poor's has downgraded the outlook for the UK's credit rating to negative, the agency stopped short of downgrading the country's actual credit rating in the absence of a definitive policy on cutting the deficit.

Fitch's report suggests that the new government will have to be more aggressive in its consolidation plans than was previously indicated in the April 2010 budget, which assumes a deficit of 8.5% in 2011/12, and 5.2% in 2013/14. The agency indicated that a “clear [fiscal policy] agenda” could remove uncertainty and lack of confidence in the UK, and stave off a downgrade.

Fitch's report said: “While a similar deficit reduction trajectory to that set out in the April 2010 budget, but based on realistic growth assumption, might be viewed as more credible, it may still run the risk of leaving the UK as something of a standout relative to the deficit targets of other advanced countries, the US notwithstanding.”

Citing updated statistics on the state of the public finances in the UK, Prime Minister, David Cameron, on June 7, warned UK taxpayers that painful spending cuts would need to be implemented imminently as part of a five-year retrenchment plan.

TAGS: tax | economics | business | fiscal policy | budget | United Kingdom

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