S&P voices confidence in UK's ability to manage debt

London Britain kept its AAA grade with a stable outlook at Standard & Poor's as the ratings company disagreed with Moody's Investors Service and Fitch Ratings on the risks to the government's ability to pay its debts.

The coalition led by Prime Minister David Cameron will succeed in maintaining its focus on curbing the budget deficit, S&P said in a statement Friday in London, as it praised the nation's political institutions for their capacity to react "quickly" to economic challenges.

"The stable outlook reflects our current expectation that the UK government will implement the bulk of its fiscal consolidation programme and that economic growth will not falter more than what we currently project," the ratings company said in the statement.

The decision contrasts with those of Moody's and Fitch, both of which warned in the past two months that the UK faces the risk of losing its top grade. Chancellor of the exchequer George Osborne has drawn on such threats to insist that the government "cannot waver" from its deficit-cutting commitment, which he reaffirmed in his March 21 budget.

"The budget showed we are ready to go on making the difficult decisions that are keeping our country safe," Osborne said in a statement yesterday.

S&P's AAA rating "is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times", he said.

Drag on growth

While the government's austerity plan will "likely drag on economic growth," S&P said that "the UK economy's capacity to absorb shocks has improved."

S&P also forecast the UK deficit will reach 4 per cent of gross domestic product in the fiscal year ending in 2016, more than the 2.9 per cent government estimate, as economic growth will probably fall short of the Office for Budget Responsibility's forecasts. Government debt will peak in 2014, the ratings company said.

Osborne last month maintained his plan to eliminate most of the budget deficit by 2017 in the biggest squeeze on public spending since the Second World War.

Moody's published its decision to place the UK's rating on negative outlook on February 14, saying that the nation risks losing the grade if the economy deteriorates. Fitch followed on March 15, less than a week before the budget, noting that Britain has a limited ability to deal with shocks.

"We expect the UK political consensus on fiscal policy will broadly hold for the near future, and that the government will implement the measures specified in its fiscal consolidation program in order to achieve its targeted savings," S&P said in its statement Friday.

The stable outlook reflects S&P's view that the government can keep cutting the deficit, that net debt as a percentage of GDP will stabilise by 2014, and that "the economic recovery will gain traction over the medium term," the ratings company said.