UK Faces Credit Downgrade
by Why the UK may lose its AAA rating, and its implications.
Recently, credit ratings agencies changed the outlook for UK goverment debt to negative, meaning their is a 30% chance the rating may be reduced in the future. This sparked a movement in currency and bond markets.
During a recession all governments need to borrow because of falling tax revenue and higher benefit claims. The UK’s problem is that it has been borrowing in the past to prop up GDP and make people feel happy. If you strip out inflation and government spending you get real insight to the strength of the economy.
As you can see there has only been two years of above average growth since 2001. Effectively, the government has been inflating the GDP figures by borrowing and spending. The government is now forecasting a 20% fall in non goverment GDP. If there is no private sector to generate income to be taxed, the government will struggle to repay the debt in the future.
Some people are not conserned about the default claiming the government can simply print money to repay the debt. However, the government is dependant on foreign borrowers. If they start printing money the currency will plunge.
It is this fear that is encouraging UK investors to move their money overseas and foreign investors choosing to spread their risk and reducing their exposure to the UK. The end result is a reduction of capital availible for business, further reducing the private sector’s ablilty to grow.
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