On 22 March 2013, two days after Chancellor of the Exchequer George Osborne delivered his 2013 Budget Address to the House of Commons, Fitch Ratings agency placed the UK's "AAA" Long-term Issuer Default Ratings (IDR) on Rating Watch Negative (RWN). The agency stated that it was more than likely that by the end of April 2013, by which time the agency will have made a full review of the UK's sovereign ratings, it is more than likely that the UK will be downgraded.
Fitch's current understanding does not yet take full account of the measures in Mr Osborne's 2013 Budget and is based on figures which have been supplied by the Office for Budget Responsibility (OBR). The OBR has told Fitch that UK government debt will peak higher and later than the figures used by the agency in September 2012 when it chose to confirm the country's "AAA" rating. General government gross debt (GGGD) and public sector net debt are now expected to peak in Budget Year 2016-17 at 100.8 per cent and 85.6 per cent respectively of Gross Domestic Product (GDP) and will not begin to fall until Budget Year 2017-18.
Having previously calculated that the UK's debt would peak in 2015-16 at 97.3 per cent of GDP, the agency's position is that if GGGD is above 100 per cent of GDP with no "firm downward path towards 90 per cent" over a medium term, then a downgrade is very likely.
The September 2012 figures used by Fitch, also projected growth of 1.5 per cent and 2.0 per cent for 2013 and 2014 - if only! - and these have recently been corrected to a more sober 0.8 per cent and 1.8 per cent respectively, fairly close to the OBR's projections (0.6 per cent growth for 2013-14). This does not mean that Robert Chote's OBR and the Chancellor coupled with Danny Alexander, Chief Secretary to the Treasury and who has particular responsibility for the Government's Deficit Reduction Plan, are all quite singing from the same hymn sheet. Shortly before Mr Chote and the Chancellor appeared before the Treasury Select Committee on 26 March to answer questions on the Budget Statement, the OBR posted this notice on their website:
"Weaker receipts halt fall in Deficit -
Tax receipts are expected to be weaker over the next few years than we expected in December...As a result, public sector net borrowing will be broadly stable at around £120 billion last year, this year and next, after adjusting for recent policy decisions with a temporary effect on the headline deficit"
It's that last phrase which registers a sting in the tail, for as Mr Chote explained to Committee Chairman Andrew Tyrie, December's receipts were weaker due to poorer income tax receipts and less money than had been expected from the Government's 4G auction. According to the OBR, this resulted in the Treasury shoving 2012-13 spending into future years because of "exceptional inter-period flexibility" in order to reduce the Deficit! A number of sources said that the OBR's estimate for this exercise amounted "at least £1.6 billion" in order to achieve a reduction of £100 million in the overall 2012-13 figure to £120.9 billion. The Institute of Fiscal Studies (IFS) a politically independent research body in an article for TheSpectator produced an OBR table (4.36 March 2013, Economic and Fiscal Outlook) with the 2012-13 Deficit at £123.2 billion.
Whoever is right - it alters the Debt/GDP percentage figure by a fraction around the seven per cent mark - it comes on top of Mr Chote's letter to Prime Minister David Cameron on 08 March clarifying, from the OBR's standpoint, comments made by the PM in the Commons the previous day. Mr Cameron had blamed the UK's depressed growth "on the financial crisis...problems in the Eurozone...and a 60% rise in oil prices between August 2010 and April 2011" and had nothing to do with the (Government's) deficit reduction plan. Mr Chote reminded the PM that every OBR forecast since June 2010 has "incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term", putting the drop in GDP at 1.4 per cent in 2011-12.
The Budget itself was cleverly presented with the emphasis on future carrots after 2014, 2015 with not much on the pain that has been more coming on stream since. Examples of this are the raising of the personal income tax threshold (before people will start to pay income tax) to £10,000 - Lib Dem policy favourite and a year earlier than initially promised - or both parents (if both are working) being given up to £1,200 per year in childcare costs, again by 2015. Popular items like the scrapping, once more, of the increase on fuel duty due in September 2013 and a penny decrease in beer duty instead of an increase are all very well but decrease the Government's revenues.
For people trying to get on the housing market, or parents wanting to help their kids to, the best part of the Budget was the extension of shared equity schemes and the availability to "homebuyers" of interest-free loans (after raising an initial five per cent deposit) of up to 20 per cent of the value of new-build properties and bank guarantees for up to £130 billion of new mortgage lenders. There was much sniping from critics on these measures being used by millionaires to buy second homes and such but that is for later detail to be sorted out and should not detract from what should be a popular policy. The Government are hoping for an increase of 190,000 "home" purchases whilst the not-so-rosy predictions expect about 50,000.
Businesses should be pleased at the reduction in the Corporation Tax from 21 per cent to 20 per cent by 2015. This is a sharp rate when compared to other major economies. Notable examples of corporation tax rates include:
Belgium - 33.9 per cent; France - 33.33 per cent; Germany - 29.8 per cent; Italy - 31.4 per cent; Netherlands - 20 & 25 per cent; Spain - 25 & 30 per cent
Yet there was no escaping Fitch's fundamental outlook of the Government's failure to make that "firm downward path towards 90 per cent" Debt to GDP ratio. Deficits of tens of billions, far less £100 billion per year, are just felt to be unsustainable by an economy such as the UK's. Shortly after Budget day, Steve Hawkes, Business Editor of the Sun newspaper quipped that Mr Osborne had only confirmed that Britain's debts would be far higher for far longer and that no meaningful reform of the public sector had been undertaken, ending:
"And in spending yet another Budget Day treading water, Mr Osborne is showing that to the Government, votes matter more than the serious economic restructuring we need."
There is little doubt that the Chancellor has been under pressure to ease the pain as much as possible and the unforeseen crisis in Europe, to mention but one problem, nullified the assumption made by the Coalition in 2010 that after a couple of wobbly quarters, the economy would drift back to its long-term trend. The increases in income tax allowances, cuts in corporation tax and fuel duties and the like, will have cost the Treasury by 2016-17 according to Paul Johnson of the IFS, at least £24 billion per year. No small sum.
Some of what is to be done to tackle the Deficit was mentioned in the 2013 Statement. Pay rises in the Public Sector will be limited to one per cent per year until 2015-16. Except for Schools and the NHS, all government departments are to cut their budgets by one per cent in 2013-14 and 2014-15 and this is to be followed by a further cut of £11.5 billion in 2015-16 - the letters for that snip were sent by Danny Alexander on 28 March so lots for department heads to think over during the Easter weekend.
One cheery piece of news, the Paris-based Organisation for Economic Co-operation and Development (OECD) reported on 28 March that the UK economy had grown by 0.5 per cent during Quarter1 and predicted that the second Quarter should see growth of 1.4 per cent. All this growth just can't come soon enough!