Cabinet colleagues tell chancellor that downgrade is inevitable and he should tell voters it will not affect borrowing costs
Cabinet colleagues have warned George Osborne not to try to protect Britain’s AAA credit rating because its loss is now inevitable and voters should be told it is unlikely to lead to higher borrowing costs.
Osborne insisted he wanted to defend the UK’s prestigious credit rating. He said: “The credit rating’s important and the market is important, and the reason why this matters to people is because if you don’t have credibility, if you’re not able to show the world that you can pay your way, then interest rates go up for the government.”
In the wake of the autumn statement, the credit rating agency Fitch warned the UK was at greater risk of losing its status. This was because of breaking its supplementary rule to ensure debt was falling as a proportion of GDP by the end of the parliament. Fitch put the UK on “negative outlook” in March 2012 – meaning the rating was under threat – but said on Wednesday: “Missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the [AAA] rating.”
Danny Alexander, chief secretary to the Treasury, said in the summer that losing the rating would not be “the be all and end all”, but was criticised within the Treasury for his remarks.
But economic ministers are now telling colleagues that the credit rating agency’s own standing is much reduced due to its performance in the financial crisis.
It is also being pointed out that the borrowing costs for France and the US have not increased despite those countries losing the AAA rating. Ministers are suggesting that, in the US election, Mitt Romney, the Republican challenger, made few efforts to attack Barack Obama over the loss of the US’s AAA status in a lengthy campaign, and if Republican aides did mount such an attack, they gained no traction. They add the UK has its own currency.
Interviewed on BBC2’s Newsnight, Robert Chote, chair of the Office for Budget Responsibility, the government’s fiscal watchdog, said: “Other countries have seen downgradings and have been in a similar sort of position and it’s not made an enormous amount of difference to the reactions the markets have to them.
“Often credit ratings agencies are looking at the same information that everybody else does and it’s not clear what additional information a would-be investor in British government debt learns from that that they couldn’t have learned from looking at our forecasts and other forecasts.”
But Osborne has said protecting the AAA status was one of his objectives along with reducing borrowing and cutting the deficit. Osborne warned that losing the support of the credit ratings agencies might mean taxpayers “have to pay more to fund the debt; but also, interest rates in the economy go up, mortgage rates go up, small business rates go up”.
He added: “And one of the things we’ve been able to do as a government is keep those rates very, very low because the world has confidence in us.”
Michael Hewson, senior market analyst at CMC Markets, said: “The ink had barely dried on the latest autumn statement before ratings agency Fitch warned in no uncertain terms that the UK government’s failure to hit its debt targets ‘weakens the credibility of the UK’s fiscal framework’.
“This statement suggests that it’s fairly certain that the rating will be cut next year; however credit ratings aren’t what they once were three years ago when 10-year gilt yields were above 4%.
“The world has become a much changed place since then and it seems quite likely that a cut in the rating wouldn’t be the disaster it might have been then, as the recent US and French experience has shown.”