Ratings agency Standard & Poor's lowered its outlook on Britain to negative on Thursday, citing government debt that would be hard to rein in and political uncertainty about the policy response with an election looming.
The agency affirmed Britain's 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.
We have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term, Standard & Poor's credit analyst David Beers said in a statement.
Beers said S&P had a more cautious view than the government of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow.
Britain's finance ministry said uncertainty in the economic outlook meant S&P could revise back its negative outlook and that last month's budget had set out a path to cut a deficit forecast to hit 175 billion pounds ($276 billion) this year.
There are significant uncertainties in the global economy at the present time and S&P point out that the outlook could be revised back to stable 'if fiscal outturns are more benign than (they) currently anticipate', a Treasury spokesman said.
The Budget set out a clear plan to halve the deficit in five years. That judgment was based on a deliberately cautious view of the public finances, the Treasury said.
Analysts said S&P had heaped further pressure on the next government to act to rein in public debt. An election is due by mid-2010 and the opposition center-right Conservatives are tipped to win.
Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day -- but today's announcement by S&P puts that much more pressure on the next government to act quickly, Colin Ellis of Daiwa Securities said.
Official data released minutes after the S&P announcement showed British public borrowing hit a record high for the month of April -- the first month of the new tax year -- as the recession-hit economy battered public finances.
The June gilt future and the pound tumbled sharply after the S&P announcement. British share prices also fell.
Fellow ratings agency Moody's declined comment on its plans.
It was the first time that Britain had been on negative outlook since S&P introduced outlooks in the 1980s, an S&P spokesman said. Britain has been on a AAA rating since 1978.
In his April budget, finance minister Alistair Darling said public debt would spiral -- with a record 220 billion pounds of gilt issuance this year -- but would decline further out based on assumptions of a return to growth which business chiefs and economists have described as optimistic.
S&P said Britain's ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility and relatively flexible product and labor markets.
But an election due by next year was creating uncertainty about government policy despite support across the parties for fiscal tightening.
The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term, Beers said.
Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.
(Writing by Mike Peacock; editing by Chris Pizzey/Ruth Pitchford)