“Keeping the markets onside”, as it is referred to, was seen as a crucial element of the government’s fiscal strategy when it embarked on its current deficit reduction programme in 2010.
With net debt now expected to peak at 77.9% in 2015/16, breaking the supplementary fiscal rule, and general government gross debt expected to peak at 97.4% of GDP in 2015/16, the rating agencies have their sights on the UK’s coveted AAA rating.
In the past, the agencies have signalled that they expected the debt rule to be broken, but nevertheless kept the rating unchanged, so it may be that they take the view that it is the spirit, rather than the letter of the law, that counts. As long as any slippage is due to the use of automatic stabilisers (weaker than expected growth), rather than a change of plan, they will not be unduly concerned. Nevertheless the UK is skating on very thin ice.
Should we care? Certainly markets were not unduly perturbed by the revelations in the Autumn Statement, and gilt yields actually fell on the day.
With AAA status an increasingly rare commodity, in the event of a downgrade to AA+, we will be keeping company with the US, France and the Isle of Man.
