Rating warning ‘reminder to hold line on austerity’

Treasury Chief Secretary Danny Alexander said an influential credit agency’s move to a “negative outlook” on the prospects of the UK economy retaining its AAA rating was a “salutary reminder” of the need to maintain austerity measures.

Fitch moved the country’s rating from stable after deciding its exposure to a fresh eurozone crisis made it more likely than not that it would be stripped of its top-rating by 2014.

The move, which is being seen as a pre-Budget warning to Chancellor George Osborne, follows a similar downgrade by another of the top agencies last month.

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The Reform think-tank, which describes itself as independent and non-party, has warned the Chancellor’s “hard-earned fiscal credibility is at risk”.

Its chief economist, Patrick Nolan, attacked Mr Osborne for “moving the goalposts” on his deficit reduction plan instead of implementing further spending cuts and tax changes. He said extra spending to help the “squeezed middle” would repeat the waste of previous years and increase the size of the fiscal hole.

Reform recommends an end to the ring-fencing of the NHS, education and welfare budgets, generating savings of around £18bn per year by 2014-15.

“Nothing damages credibility and confidence more than a Chancellor who moves the goal posts when the going gets tough,” Mr Nolan said. “The Budget needs to show that the Government will meet its deficit target come hell or high water, regardless of slow growth in the future.”

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Fitch said it considered the Government’s deficit-reduction plans to be “credible” and on track and that it expected them to be sustained in the Budget. But the agency said current projected levels of future debt were “at the limit of the level consistent with the UK retaining its AAA status”.

Mr Alexander insisted the news should act as a “wake-up call” for those urging the Government to ease up on stringent deficit-reduction plans and said: “There will be no unfunded giveaways in next week’s Budget.”

He went on: “This is a salutary reminder as to why Britain needs to deal with the enormous debts and deficits we inherited, why we have got to stick to those plans.”

Richard Little, tax partner at KPMG in Leeds, argued that Mr Osborne, who will announce the budget on Wednesday, should prioritise growth.

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“Growth is the priority; Yorkshire’s businesses are looking for focused assistance and consumers need relief,” he said. “It appears that the Chancellor has some room for manoeuvre but public finances are too tight for a ‘giveaway’ budget to be on the cards.

“For business, valuable tax changes to incentivise investment are anticipated. In particular, assistance around capital allowances could get infrastructure developments underway, driving growth.”

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