BEIJING, May 24 (Xinhua) — China’s first domestic rating agency, Dagong Global Credit Rating Co. Ltd., on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the United Kingdom by one level to A+ from previous AA- with “negative” outlook.
The Chinese rating agency said the downgrade reflected the UK’s deteriorating debt repayment capability.
The GDP growth rate of UK in 2010 was 1.3 percent, lower than average growth rate of the world economy, with budget deficit accounting for 9.8 percent of its GDP…
They’ve got a point. Nasty UK public sector borrowing figures on Tuesday via the Office for National Statistics:
For measures excluding financial interventions:
the public sector current budget was in deficit by £8.4 billion; this is a £2.8 billion higher deficit than in April 2010, when there was a deficit of £5.6 billion;
public sector net borrowing was £10.0 billion; this is a £2.7 billion higher deficit than in April 2010, when net borrowing was £7.3 billion;
public sector net debt at the end of April 2011 was £910.1 billion (60.1 per cent of GDP) up from £765.5 billion (53.0 per cent of GDP) at the end of April 2010.
For measures including interventions:
the public sector current budget was in deficit by £6.2 billion; this is £2.6 billion higher deficit than in April 2010, when there was a deficit of £3.6 billion;
public sector net borrowing was £7.7 billion; this is £2.4 billion higher net borrowing than in April 2010, when net borrowing was £5.3 billion;
public sector net debt at the end of April 2011 was £2252.9 billion (148.9 per cent of GDP). This compares to £2180.0 billion (150.9 per cent of GDP) as at the end of April 2010.
The public sector net cash requirement (see table PSF4) was £3.3 billion, a £9.1 billion higher net cash requirement than in April 2010, when there was a net cash requirement of -£5.8 billion.
The Treasury has been busy spinning the worst April on record for public borrowing as a one-off. There was just so much banking tax heading into coffers in April 2010, that April 2011 couldn’t help but look bad in comparison — hence the extreme move in that net cash requirement.
True, but that’s no alibi. While April is a poor month for tax revenue (and spending tends to peak at the turn of the financial year) and we expect it’ll improve again over summer, there’s a real reminder here that the gulf in economic growth is a serious revenue risk. Still, not everyone agrees. Here’s Philip Rush of Nomura:
In regard to the impact of the fiscal consolidation programme on activity, reductions in government spending mechanically hit GDP growth because they are part of GDP. So far, the spending cuts have largely been on investment projects, with real-term cuts in current expenditure only just beginning now. But the fiscal consolidation programme really began in January 2010 when VAT was returned to 17.5%. The additional 2011 VAT hike was one of the largest single blows in the whole consolidation programme and it was largely shrugged off. Abstracting from the bad weather, output from the distributive trades, which are most affected by VAT changes, still grew despite the hike. So while we calculate the direct effect of planned tax hikes and spending cuts in 2011-12 to subtract about 1.5% from GDP, the fiscal multiplier on the private sector has so far appeared to be much lower than many feared. The recent winter weakness was caused by bad weather and some questionable construction data, not fiscal consolidation…
We’ll get the OBR’s comment at noon pixel time…