Fitch warns Britain must act quicker on public finances
Britain needs to put its public finances in order much quicker as it faces a "formidable" fiscal challenge after an unprecedented shock to the economy, Fitch Ratings warned on Tuesday.
Fitch said that "following an unprecedented economic and financial shock, the scale of (Britain's) ... fiscal challenge is formidable and warrants a strong medium term consolidation strategy -- including a faster pace of deficit reduction than set out" in April by the previous Labour government.
The international ratings agency, looking ahead to the new government's June 22 emergency budget, did not comment directly on the outlook for Britain's top AAA rating but noted that debt had risen very fast since 2008.
Britain's AAA rating "is supported by its strong policy institutions, advanced, diversified and flexible economy, exceptional financing flexibility and historical track record of fiscal consolidation.
"However, the rise in public debt ratios since 2008 is faster than any other AAA rated sovereign and the ... adjustment required to stabilise debt is amongst the highest of advanced countries," Fitch noted in a statement.
The core public deficit "is nearly twice as large as that seen in previous episodes of fiscal deterioration in the UK in the 1970s and early 1990s," it added.
Accordingly, the new Conservative-Liberal Democrat coalition government led by David Cameron must tackle the problem faster, it said.
"A more ambitious deficit reduction path -- with borrowing one percent lower than the April 2010 Budget throughout the medium term" should lead to "a clearly declining debt path within the medium term horizon."
"This would help in going some way to restoring 'fiscal space', or a cushion against future shocks. Achieving such a path purely on the basis of further spending cuts, would imply unprecedented real declines in primary spending," the agency warned.
Britain chalked up a public deficit equal to 11.1 percent of gross domestic product (GDP) in the fiscal year to March 2010, one of the largest in the European Union and way above the EU limit of three percent.
Fitch warned that merely changing the growth forecasts in the April budget to make them more realistic would "still run the risk of leaving the UK as something of a standout relative to the deficit targets of other advanced country sovereigns."
"With other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the (British) deficit currently projected for 2011 and the failure to reduce it to three percent of GDP within five years are striking."
On Monday, Cameron said Britain's finances were "even worse than we thought" and warned of "painful" and unavoidable cuts to tackle the record deficit.
He warned that if urgent action were not taken, the consequences would be much worse as interest payments stacked up.
© 2010 AFP