Page last updated at 15:51 GMT, Thursday, 21 May 2009 16:51 UK

Rating agency warning on UK debt

budget deficit

A leading credit rating agency has revised down its outlook for the UK economy due to concerns about its significant debt burden.

Standard and Poor's downgraded its view of the UK to "negative" from "stable" for the first time since it started analysing its public finances in 1978.

It said the UK's finances were deteriorating faster than expected.

The change came as data confirmed that new government borrowing has soared, to a record of almost £8.5bn in April.

A credit downgrade could make it more expensive for the UK to borrow money
The higher cost of borrowing increases government spending, and could mean higher taxes
Bringing down the total level of debt may be politically difficult as it will require tough spending curbs and tax rises

The Office for National Statistics (ONS) said public sector net borrowing rose to £8.46bn this April compared to £1.84bn in the same month last year.

Government coffers have been hit by higher social benefits payments and lower tax receipts as unemployment has risen and businesses have closed or reduced output.

S&P said the outlook for the UK economy had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

The revision sent the pound lower, reversing recent gains. One pound fell back three cents against the dollar after the S&P statement, to $1.5514 from $1.5817.

Blow to UK

Standard and Poor's did not change the UK's triple-A rating, but said it was at risk without a credible plan to put its debts on a "secure downward trajectory" by the next government.

If the credit rating was downgraded, it could lead to higher borrowing costs if it makes international investors less likely to buy Treasury bonds.

In the past, revised outlooks have lead to downgrades in around 37% of cases.

S&P said that government debt could reach 100% of GDP by 2013 - a level it said was incompatible, if sustained, with the top credit rating.

Currently, public debt is 53% of GDP, according to the latest ONS figures.

The new outlook for the UK could lead to higher borrowing costs if it makes international investors less likely to buy UK Treasury bonds.

Putting British sovereign debt on negative outlook is not as bad as being assessed for possible downgrade, which almost always leads to a downgrade

Robert Peston, BBC business editor

One reason it has been changed is the belief by the ratings agency that the government will eventually be liable for costs of between £100bn to £145bn (between 7% and 10% of GDP) for bailing out the banking system - more than double the cost estimated by the Treasury.

Treasury minister Stephen Timms told the BBC that the department had "set out plans in the Budget to halve the deficit over the next four years and to bring the public finances back into balance in the medium term".

He added: "That is the discipline that is needed at the moment and that is the discipline that we are delivering."

And Mr Timms pointed out that other ratings agencies had not changed their view, "so Standard and Poor's is on its own on this".

For the Conservatives, shadow chancellor George Osborne said that "Labour are putting our economic stability at risk by refusing to face up to the debt crisis they have created."

Liberal Democrat Treasury spokesman Vince Cable called on the government to "come clean about how it intends to pay back its debt" or risk "a further deterioration in Britain's rating".

Forecast at risk

Alistair Darling
Mr Darling's borrowing forecast may be too optimistic

The new figures suggest that the government may miss its forecast of public borrowing of £175bn for this financial year 2009-10 - itself a massive increase on last year's public borrowing of £90bn.

"It is obviously very early days, but the dreadful April public finance data and ongoing sharply deteriorating trend suggest that the chancellor is straight away on the back foot in his expectations [for public borrowing]," said Howard Archer of IHT Global Insight.

We are not about to lose our triple-A rating yet. And none of the other big ratings agencies has changed its view

Stephanie Flanders, BBC economics editor

The narrow measure of public sector borrowing, the current budget deficit, also increased sharply in April, rising to £7bn compared to just £728m in the same month one year earlier.

The recession has sharply reduced government tax receipts, especially from the corporate sector and bonus payments in the financial sector.

Meanwhile, the government is having to pay out more in benefits as unemployment continues to rise.

Income tax and VAT receipts were both around £2bn lower in the month compared to one year ago, while social benefit payments were £1bn higher.

Gemma Tetlow of the Institute for Fiscal Studies said that the figures "suggest cash tax receipts have fallen compared to the same month last year while spending - particularly on social benefits - have grown strongly" but she said it was too early to tell whether government borrowing was on target.

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