UK Borrowing Reaches Precipice

The long-term sovereign credit rating outlook of the UK is now downgraded, according to credit rating agency Standard & Poor’s. The new ‘negative’ credit outlook, from ‘stable’, comes based on the fact that the government is continuing to borrow at levels that are quickly reaching 100% GDP. The news is likely to force the government to reconsider stamp duty relief—the suspension of taxes on recently purchased properties. The decision to extend the ‘holiday’ on stamp duty through the rest of 2009 will continue to erode tax revenues. The rise in unemployment in the country also represents a double hit: A loss in taxable income coupled with a rise in benefit pay-outs. The decision to modify the long-term credit rating outlook hints that S&P may lower the country’s triple-A rating to double-A if conditions in the UK coffers do not improve. If such a downgrade occurs, the government would no longer be able to issue triple-A debt, which would make Treasuries less competitive than other triple-A rated nations, such as the United States. Standard & Poor’s credit analysts say: “We base our opinion on our updated projections of general government deficits in 2009-2013.” “These projections reflect our more cautious view 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,” they add. The rating agency notes that the triple-A ratings of the UK are confirmed for the time being. Long-term rating outlooks assess the potential direction of a rating, typically over a period of up to two years.  An outlook does not necessarily precede a rating change. Meanwhile, housing conditions in the country are not improving. Gross mortgage lending declined to an estimated £10.4bn ($16.3bn) in April, down 9% from £11.4bn in March and 60% from £26.1bn in April 2008, according to new data from the Council of Mortgage Lenders, a trade body that represents around 95% of real estate players in the UK. “It’s still too early to spot a clear pattern of recovery in the housing market as some commentators have suggested,” says CML director general Michael Coogan. “Activity remains weak, and we have said we will see volatility in monthly lending figures as we bounce along at the bottom of the market. Our forecast for gross lending of £145bn in 2009 remains unchanged.”
Write to Jacob Gaffney.

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