Britain is still in danger of losing its triple-A rating despite the ambitious fiscal tightening announced by the country's new coalition government last month, Standard & Poor's said on Monday.
The verdict is a blow to finance minister George Osborne who has staked his reputation on tackling Britain's record budget deficit -- running at 11 percent of GDP -- and keeping its top-notch credit rating.
Given the government's stated determination to protect the UK's AAA credit rating, it is likely to be more than a little disappointed by Standard & Poor's move today, said Howard Archer, economist at IHS Global Insight.
The Treasury responded to the news, saying Osborne was aware there was more work to do. The Chancellor is very clear the job is not done, a spokesman said. The next step will be to set out individual departmental spending totals in the Spending Review on 20 October.
S&P said it was keeping a negative outlook on Britain's triple-A credit rating since challenging spending cuts had yet to be made and the economy may not grow as fast as the government had factored in.
Standard & Poor's medium-term economic forecasts for the UK are less optimistic than the assumptions underlying the budget, the credit rating agency said in a statement.
We therefore believe there is still a material risk that the UK's net general government debt burden may approach a level incompatible with the 'AAA' rating.
The pound fell after the announcement, which disappointed some investors who had hoped Osborne's austerity budget had done enough to persuade the ratings agency to give Britain the all-clear. Sterling fell to $1.5017 in the minutes after the S&P announcement, from $1.5068 just before. It was trading at $1.5024 by 1639 GMT.
Britain's coalition government unveiled a package of spending cuts and tax rises in an emergency budget on June 22 designed to cut a record budget deficit to almost nothing in five years.
S&P cut the outlook on Britain's 'AAA' rating to negative in May 2009, a move that typically carries a one in three chance of a downgrade. Its stance contrasts with more favorable views from Moody's and Fitch, both of which have affirmed a stable outlook on Britain's triple-A rating in recent weeks.
Britain's government is hoping that around three quarters of the fiscal squeeze will be borne by spending cuts, rather than tax increases, and will give more details on where the axe will fall in a spending review in October.
We will continue to review the rating in light of further information over the coming months about the extent of the expenditure-led fiscal consolidation, S&P said.
The ratings agency said the fiscal challenge facing Britain's government was a formidable one.
It said its growth assumptions were lower than those of Britain's fiscal watchdog, the Office for Budget Responsibility (OBR), because it reckoned private sector deleveraging will hit demand harder.
We estimate domestic credit in the UK to be just over 200 percent of GDP in 2010, compared with a median of below 150 percent of GDP for 'AAA' rated sovereigns, S&P said. So, while we agree with the OBR that a rebalancing of the economy will occur over the next five years with net exports contributing positively to growth, we think the process will likely proceed more slowly.
(Reporting by Christina Fincher and John Parry; Editing by Susan Fenton)