Britain's prized triple-A sovereign debt rating could come under pressure if the government strays from its path of public deficit cuts in the face of weaker growth, credit agency Standard & Poor's said on Monday.
In a release that coincided with a keynote speech by finance minister George Osborne at his Conservative Party's annual conference, S&P said British growth was likely to be slower than the government expected.
It reaffirmed its AAA rating and said the outlook was stable, but warned tax revenues could come under pressure as fiscal austerity weighed on the economy, though easy monetary policy should provide some support.
The ratings could come under downward pressure if, against our expectations -- and perhaps in response to weakening growth prospects -- the coalition government's commitment to fiscal consolidation falters, it said in a statement.
Britain's economy has been virtually stagnant for almost a year, leading many experts to downgrade their growth forecasts for 2011 and 2012 and putting pressure on the government to come up with a plan to boost the recovery.
The Conservative/Liberal Democrat coalition has insisted it will stick to plans to virtually eliminate a budget deficit of around 10 percent of GDP by 2015, warning that easing the pace of consolidation risks hitting market confidence in Britain.
Yields on British government debt have fallen to record lows in recent months as ongoing worries about the euro zone debt crisis have driven investors to seek safer assets.
S&P noted that demand for British gilts was strong and that the long average maturity of its debt should help keep Britain's borrowing needs low compared with its peers.
There was no clear reaction on the gilts or currency markets reaction to the S&P statement.
WEAK GROWTH OUTLOOK
S&P said Britain's economic recovery had been lackluster and that the government's austerity measures would weigh on growth.
It expects Britain's economy to expand by an average 1.8 percent between 2011 and 2014, well below the 2.5 percent growth forecast by the Office for Budget Responsibility watchdog.
S&P also said the government's assumption that the private sector would quickly step in to fill the shortfall in demand left by public spending cuts may prove optimistic, because of weakening demand from abroad and underlying structural issues.
Weak growth was likely to translate into slower tax revenue growth, which could put public finances under pressure.
Nevertheless, accommodative monetary policy should, in our view, provide some support to the economy, as low interest rates keep private-sector debt-servicing costs low, and the currency at competitive levels.
The Bank of England is widely expected to leave interest rates at a record low of 0.5 percent throughout 2012 and there is growing speculation it will soon embark on another round of asset purchases to kick-start growth.
Finance minister Osborne said on Monday that the Treasury was looking into ways to inject credit directly into the economy.
(Reporting by Fiona Shaikh and David Milliken; Editing by John Stonestreet)