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
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 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.