By Maximilian Clarke
Moody’s have put the UK’s AAA credit rating on ‘negative outlook’, meaning there is a 30% chance the UK could suffer a devastating downgrade within the next 18 months.
The Coalition Government’s spending cuts have been heavily criticised by opposition and trade unions for their damaging effects on consumer and business confidence. But Chancellor Osborne has repeatedly insisted they were a necessary evil in order to protect the UK’s credit rating.
A reduction from highest AAA ranking would see the cost of the UK’s debt soar, undermining any reductions in expenditure from the cuts.
Commenting on the news, the British Chambers of Commerce have encouraged the government to pursue the necessary expenditure cuts, though have called for a renewed focus on encouraging growth.
John Longworth, the Chambers’ Director General said:
"British business has been clear from the beginning that the government must do all it can to promote growth while eliminating the country’s structural deficit and protecting the UK's triple-A credit rating. It is a difficult balancing act. The ratings agencies recognise that both growth and fiscal consolidation are crucial to Britain's market credibility.
“While many of the issues facing the Chancellor are created by matters outside his direct control, such as the eurozone crisis, it is vital that he and the Prime Minister focus on making Britain a place for businesses to grow. We are currently facing double jeopardy, with risks arising from both a failure to meet our deficit reduction targets and also from a significant period of low growth. Stagnation, too, would undermine both deficit reduction and efforts to reduce net debt.
“The Chancellor and the Prime Minister must pull out all the stops to enable British businesses to drive growth here at home. Reforms to employment law and planning must be significantly speeded up and promised infrastructure projects must start on-site. Regulations must be slashed, access to capital improved so as not to choke off recovery, and business needs a favourable and encouraging tax regime.
“The Moody's report underlines the fact that ministers must move from rhetoric to real, tangible action and delivery on all fronts to support business. The Chancellor's forthcoming Budget must also do more to support business confidence and jobs without endangering Britain's financial credibility."
And the BCC’s Chief Economist, David Kern, added:
"The UK structural deficit is still unacceptably high, and reducing it must remain a key policy priority. But the forceful measures adopted by the Chancellor since June 2010 have earned him considerable credibility in the financial markets. We believe that as well as using the ‘automatic stabilisers’ when the economy is weaker than predicted, the UK can redeem some of its strong market credit without endangering our AAA rating.
“Since the fiscal mandate relates to ‘the cyclically adjusted, or structural, current balance’ and not to the total deficit, the Chancellor can now consider spending measures that would not affect either the current budget or the structural deficit. This could mean more infrastructure investment, temporary reductions in the cost of employing people, or temporary increases in capital allowances.
“The precise scale of any stimulus that can be safely provided in the Budget is a matter of judgment. The Chancellor will have to be very cautious, so as not to put the UK’s AAA credit rating at risk. Our estimate is that a fiscal stimulus totaling some £3-5bn would be consistent with maintaining strong UK market credibility."
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