Sterling tumbled from its three-month high yesterday after Fitch, the ratings agency, took a shot across the Government’s bows, warning that its huge budget deficit put it most at risk of a ratings downgrade among its toprated peers.
The pound fell by as much as 0.9 per cent against the dollar and 0.4 per cent against the euro after David Riley, co-head of global sovereign ratings for Fitch, said that Britain needed to make “the largest budget adjustment” to maintain its credit rating in the long term among the countries that it rates AAA.
However, Fitch maintained its “stable” outlook on Britain’s sovereign debt, meaning that it did not foresee a downgrade. That is because Fitch expects whichever party wins the general election to rush in significant measures to reduce debt.
Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: “Fitch looks to be firing a warning shot across the bows, reminding people that we have a huge budget deficit and that fairly serious remedial action is going to need to be taken to sort this out.”
Although a ratings downgrade looks unlikely, the CBI said that the very suggestion that it could be at risk undermined confidence in Britain. John Cridland, the CBI’s deputy director-general, said: “The UK’s AAA credit rating must be put beyond doubt and the budget returned to balance by 2015. We have called on any new administration to set out within 100 days of taking office a clear and credible path to achieve this aim.”
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George Osborne, the Shadow Chancellor, said: “We all need to sit up and listen to this warning ... Britain is singled out for concern over the size of our debt crisis and the message could not be clearer: if we don’t start dealing with those debts, we will face a downgrade. When will Gordon Brown listen?”
The Prime Minister said: “We have assured people that we are taking the necessary action to cut the deficit in half.”
Lord Davies of Abersoch, the Trade Minister, said: “The Government has been very clear that over the next four years there’s going to be a programme to reduce the public debt level.”
Britain reported last month the biggest budget deficit for any September since records began in 1993, as the recession hit tax revenue and increased the cost of meeting unemployment benefit. The £14.8 billion shortfall compared with an £8.7 billion deficit in the year-earlier period.
Fitch’s comments on government debt came as data showed that Britain’s goods trade deficit with the rest of the world had grown by more than expected in September, as rising car and oil imports outweighed the increase in exports generated by the weak pound. The goods trade deficit widened to £7.2 billion in September, from £6.1 billion the previous month, as the Government’s “cash for bangers” scrappage scheme pushed car imports up by £432 million, or 30 per cent, in the month, according to the Office for National Statistics.
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The oil deficit also widened to £500 million, its biggest since July 2008, as domestic production was suppressed by summer maintenance work on North Sea oil refineries extending into September. The overall deficit in both goods and services also widened, from £2.2 billion in August to £3.5 billion in September, the widest since August 2008, ending a recent trend of a narrowing deficit.
Economists were disappointed with the deficit because they had hoped that the 25 per cent decline in the pound in the past two years would have narrowed the trade gap.