TEXT-Fitch: autumn statement confirms scale of UK fiscal challenge
Dec 5 - The Autumn Statement and the updated forecasts of the Office of Budget Responsibility (OBR) confirm the scale of the multi-year fiscal consolidation challenge facing the United Kingdom against a weak economic backdrop, says Fitch Ratings. The fiscal and macroeconomic forecasts were again revised downwards by the OBR, as in previous updates over the past two years. The OBR now judges that the "supplementary target" of falling public sector net debt by 2015/16 is likely to be missed. This is consistent with our assessment in September. The government has chosen not to chase the supplementary target by deploying additional consolidation measures over the next two years. In our view, missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the rating. We forecast gross general government debt to peak at 97% in 2015-16, approaching the upper limit of the level consistent with the UK retaining its 'AAA' status. Fitch placed the UK's 'AAA' rating on Negative Outlook in March 2012. The agency will conduct a further formal review of the rating in 2013, incorporating the government's 2013 budget. The government's "fiscal mandate" requires it to balance the cyclically adjusted current balance over a five-year rolling period. The OBR's assessment is that the mandate will be met in fiscal 2016/17. This is in line with our own expectations, though the government is pushing an increasing part of the consolidation into the next parliamentary term. These measures are not yet fully specified but Fitch expects more clarity after next year's Spending Review. The OBR's new medium-term macroeconomic outlook of GDP growth of 1.2% in 2013 and 2% in 2014 is broadly in line with our own forecast of 1.1% and 2%, respectively, though significantly below the OBR's March 2012 forecast of 2.0 and 2.7%. Fitch has similar assumptions of the UK's potential growth rate to the OBR, around 2-2.25%. Nevertheless the frequent revisions to the OBR's estimate of the output gap highlight the large uncertainty around the cyclical position of the economy in the aftermath of the financial crisis. The size of the output gap has a strong bearing on fiscal consolidation path. The measures announced in the Autumn Statement are fiscally neutral and so will not further constrain the automatic stabilisers from supporting the economy. The GBP6.6bn current savings over the next two years used to fund a GBP5.5bn capital expenditure package could, over the medium term, improve the growth potential of the economy. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.