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Credit Rating Fears Return as UK Growth Slashed

Wednesday, 20 Mar 2013 | 10:31 AM ET
Rosie Hallam | Getty Images

A sharp downward revision for U.K. growth reignited fears on Wednesday that the country's credit rating could once again be downgraded as finance minister George Osborne's annual budget statement failed to inspire confidence.

Osborne said the U.K. economy is now estimated to grow by 0.6 percent in 2013, half the level in a December forecast of 1.2 percent.

He defended his track record to a rowdy parliament which over-rode the Speaker's orders on several occasions.

"We've now cut the deficit not by a quarter, but by a third," Osborne told lawmakers in the U.K. parliament. "Our economic plan combines monetary activism with fiscal responsibility and supply side reform," he said.

Osborne pledged an extra 3 billion pounds ($4.5 billion) for infrastructure projects from 2015-16 with money saved from government departmental budgets. The additional funds would be used for road and rail projects, Osborne said.

Corporation tax will be reduced to 20 percent from April 2015, Osborne said, but for the nation's banks this will be offset by a levy increase to 0.142 percent.

A planned increase in fuel duty and a beer duty will both be scrapped, he said, and the government will raise the rate of the personal tax allowance to 10,000 pounds ($15,100) in 2014-15, a year earlier than expected. A new home loan system was also announced where 3.5 billion pounds will be committed to shared equity loans to help home buyers over the next 3 years.

But news that public sector net borrowing as a share of GDP (gross domestic product) - used to measure how much the government borrows - will peak in 2016/17, a change from an earlier prediction of a peak in 2015/16, alarmed analysts.

Howard Archer, chief U.K. economist at IHS Global Insight said that the budget once again contained the "unappetizing and depressing" combination of reduced growth and higher public deficit forecasts.

"The strong likelihood is that the reduced growth and higher public finance forecasts will be the trigger for Standard & Poor's and or Fitch to follow Moody's in stripping the UK of its AAA rating," he said in a research note.

Osborne in Tough Position: Former Chancellor
Lord Norman Lamont, former Chancellor of the Exchequer, says George Osborne is currently in a very tough position, as growth, tax revenues and exports are lower than expected.

The budget comes at a time of stuttering growth for the U.K. economy with gross domestic product (GDP) for the fourth quarter coming in at -0.3 percent. For the whole of 2012 the economy grew by just 0.2 percent. In comparison, Germany's economy grew 0.7 percent in 2012.

Recent poor data - including a 1.5 percent drop in January manufacturing output - have raised concerns that the country will once again fall into a recession, but according to Wednesday's forecasts the U.K. will narrowly avoid this triple-dip into negative growth.

Moody's rating agency downgraded the country's credit rating from its prized triple-A rating in February.

(Read More: UK Must Change Course on Austerity: Opposition Leader)

BoE Remit

With the country facing high unemployment, some analysts had expected the Chancellor to alter the Bank of England's remit to give it greater flexibility to improve the economic outlook.

Although Osborne did not give the Bank of England a new inflation target - it stays at 2 percent - he did task the MPC (Monetary Policy Committee) with setting out clearly the trade offs it has made in deciding how long it will be before inflation returns to target.

"The new remit also recognizes that the Monetary Policy Committee may need to use unconventional monetary instruments to support the economy while keeping inflation stable," Osborne said.

(Read More: UK Needs $15 Billion Spending 'Kick Start' in Budget: Economists)

Sterling, which dropped to nearly 1.508 against the dollar as the Chancellor started speaking rose back above the 1.515 mark as it was announced that the 2 percent inflation target would be kept.

U.K. monthly unemployment figures for February released on Wednesday morning showed the number of Britons claiming unemployment benefits fell by 15,000 to 1.542 million - the lowest level for 20 months. The minutes of the Bank of England's monetary policy committee meeting were also released, which showed the bank was worried about further sterling weakness. Policymakers voted 6-3 against any further asset purchases, which was the same result as a February meeting.

The leader of the opposition Labour party Ed Miliband attacked the budget in parliament, saying it did little to help ordinary Britons.

"Millions pay more so that millionaires can pay less," Miliband said.

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