Boost for Osborne as S&P backs deficit reduction

The Coalition's austerity drive means that the UK still commands a top-notch AAA credit rating despite facing slower growth, Standard & Poor's (S&P) said yesterday.

The agency, which in August stripped the US of its AAA rating for the first time, reaffirmed its positive view of the UK's creditworthiness just as the Chancellor, George Osborne, took to the podium to deliver his speech at the Conservative party conference.

Endorsing Mr Osborne's cost-cutting measures, S&P said the country's AAA rating could come under pressure if the Government's commitment to scaling back the deficit faltered in the face of weakening growth.

For now, however, its analystsexpect that the "political consensus on fiscal policy will broadly hold for the near future, and that the Government will implement the measures in its... fiscal consolidation programme in order to achieve it targeted savings".

But while the Coalition wields the axe, growth will remain modest, with S&P predicting that the economy will expand by "around 1.8 per cent on average in 2011-2014, lower than the 2.5 per cent forecast by the Office for Budget Responsibility".

"Although the economy has exited recession, recovery has been lacklustre, with output essentially stagnating since the fourth quarter of 2010," the agency said. "In our view, the UK Government's efforts over the next few years to engineer a steep correction in the fiscal accounts will likely weigh on the economy."

This was "especially pertinent" in the short term, it added, as households strove to cut their debt burdens and banks tightened lending. S&P also questioned the Government's claim that the private sector would make up for cuts in the public sector.

Moreover, as economic growth faltered, the Coalition was likely to find itself with a bigger-than-expected deficit, the agency warned, forecasting "a general government deficit of around 3.3 per cent of GDP" in the 2014 calender year, against the Government's 2.6 per cent projection for the 2014-15 fiscal year.