–Calls For Faster Pace Of Deficit Reduction Vs April Budget
–Says Rise In UK Debt Since 2008 Faster Than Other Triple-A Sovs
–UK Failure To Target Deficit At 3% Of GDP In 5 Years ‘Striking’

LONDON (MNI) – Fitch Ratings says in a new special report that
following an unprecedented economic and financial shock, the scale of
the United Kingdom’s (UK) (‘AAA’/Stable Outlook) fiscal challenge is
formidable and warrants a strong medium term consolidation strategy –
including a faster pace of deficit reduction than set out in the April
2010 Budget.

The report examines the scale of fiscal adjustment necessary to put
UK public finances on a sustainable medium term path, and considers the
outlook for fiscal policy consolidation in the run up to the June 22
emergency budget.

Fitch says that:

“The UK’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 primary balance
adjustment required to stabilise debt is amongst the highest of advanced
countries. The primary deficit is nearly twice as large as that seen in
previous episodes of fiscal deterioration in the UK in the 1970s and
early 1990s.

“Existing medium term fiscal consolidation plans – set out most
recently in the April 2010 Budget but essentially unchanged since the
March 2009 Budget, despite a substantial decline in deflation risks
since then – are un-ambitious. In particular, they only achieve public
debt stabilisation at the end of the medium term horizon and are based
on arguably optimistic growth assumptions. Furthermore, planned
expenditure cuts in the April 2010 Budget were not articulated in
detail, undermining their credibility.

“Fitch notes that the new coalition government has acted very
quickly to establish fiscal consolidation as its top policy priority and
has announced immediate additional tightening measures of 0.4% of GDP in
the form of spending cuts and an emergency budget scheduled for 22 June
2010.

“Given downward revisions to last year’s deficit outturn and the
spending cuts now being implemented by the coalition, it is highly
likely that the 2010-11 deficit target will be lowered from the 11.1%
April 2010 Budget figure – indeed this must now be done to adhere to the
recently passed Fiscal Responsibility Act, which mandates that borrowing
must fall every year to 2014.

“However, while likely, it is not obvious from current policy
statements that the new government will adopt lower deficit forecasts
throughout the medium term. A clear policy agenda already exists for tax
cuts in a number of areas and it is possible that the new Office for
Budget Responsibility will deliver a more pessimistic assessment of the
economic outlook, which would offset the impact of stronger
discretionary tightening.

“While a similar deficit reduction path to that set out in the
April 2010 Budget, but based on more realistic growth assumptions might
be viewed as more credible, it would still run the risk of leaving the
UK as something of a standout relative to the deficit targets of other
advanced country sovereigns, the US (‘AAA’ / Stable Outlook)
notwithstanding. With other European sovereigns strengthening their
fiscal consolidation plans and market concerns about sovereign risk in
advanced countries increasing, both the size of the UK deficit currently
projected for 2011 and the failure to reduce it to 3% of GDP within five
years are striking.

“A more ambitious deficit reduction path – with borrowing 1% lower
than the April 2010 Budget throughout the medium term – would result in
an earlier peak in debt to GDP and 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.

–London bureau: +4420 7862 7492; email: ukeditorial@marketnews.com

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