Osborne Will Stick to Austerity as S&P Affirms U.K. Rating

U.K. Chancellor of the Exchequer George Osborne pledged to stick to his deficit-reduction plan, saying low interest rates are the best way to generate growth, as Standard & Poor’s affirmed the country’s AAA debt rating.

Osborne, who oversees an economy that’s barely expanded in the last year, defended his refusal to increase spending to try to spark growth in a speech to his Conservative Party’s annual conference today. He said the world is facing a “debt crisis” that means fiscal expansion carries more risks than potential benefits. Instead, the chancellor said the Treasury will look at ways of funneling money directly to British companies.

“Borrowing too much is the cause of Britain’s problems, not the solution,” Osborne told delegates in Manchester, northwest England. He said that with bond markets “ready to pick off the next country that lacks the will to deal with its debts,” deviation from his program would “be abandoning the deficit plan that has brought us the stability other nations today crave.”

His case was supported by S&P’s announcement, published as he started his speech, that it is keeping the U.K.’s credit rating unchanged, with a “stable” outlook. It’s two months since the company downgraded the U.S. credit rating for the first time, slamming that country’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

‘React Quickly’

“In our view, the U.K. has a wealthy, open, and diversified economy, supported by a well-established political system and macroeconomic policy framework, which can react quickly to economic challenges,” S&P said in its statement. “We expect economic policy to focus on closing the fiscal gap, and we forecast the government’s net debt burden to peak in 2013. The stable outlook reflects our expectation that the government will implement the bulk of its fiscal consolidation program.”

A plan to eliminate the structural deficit by 2015 by introducing the deepest public spending cuts since World War II has been the centerpiece of government policy, drawing criticism from the opposition Labour Party and unions, which say they’re leading to stagnation.

Recent poor economic data have led Liberal Democrats within the coalition government to float in private the possibility of bringing forward capital spending, according to a lawmaker familiar with the discussions. The BBC reported Sept. 20 that ministers were discussing increasing the infrastructure budget by as much as 5 billion pounds ($8 billion), without saying where it got its information.

‘Every Option’

“Don’t think I haven’t thought hard about what more could be done, that I don’t explore every option; I do,” Osborne said. He argued “we’d be risking our nation’s credit rating for a few billion pounds more.”

Osborne said that Britain would “ride out the storm” that is facing the world economy and again rejected calls for temporary tax cuts.

The chancellor said he would get the Treasury to boost the flow of credit to companies as a way of spurring growth.

“It’s known as credit easing,” Osborne said. “It’s another form of monetary activism.”

Three Options

The practice of credit easing allows authorities to buy private-sector assets to increase liquidity in the economy. The Treasury is looking at three options, according to an official at the department: instructing the Bank of England to buy corporate bonds; encouraging a secondary market for loans to small companies; or co-funding loans to such companies directly.

Business Secretary Vince Cable, a Liberal Democrat, said at his party’s conference two weeks ago the central bank should consider buying company debt to stimulate growth.

“Instead of just buying up government securities, we can perhaps do more imaginative things such as buying up corporate assets or bundles of loans,” Cable said.

S&P said Britain’s recovery will face pressure from the fiscal squeeze. The economy may expand about 1.8 percent on average through 2014, less than the 2.5 percent rate forecast by the Office for Budget Responsibility, the government’s fiscal watchdog, it said.

“The ratings could come under downward pressure if, against our expectations, and perhaps in response to weakening growth prospects, the coalition government’s commitment to fiscal consolidation falters,” S&P said in its statement. “Such downward rating pressure could stem from a reappraisal of our fiscal deficit forecasts or of our view of the government’s ability to implement its current fiscal strategy.”

Consumer Pessimism

The International Monetary Fund cut its forecasts for U.K. economic growth last month to 1.1 percent this year and 1.6 percent in 2012 from previous projections of 1.5 percent and 2.3 percent respectively. U.K. consumer confidence fell to a four-month low in August as Britons grew more pessimistic about the outlook for the economy, Nationwide Building Society said.

Bank of England policy makers debated adding more stimulus to the economy last month in a meeting that was “finely balanced.” They will probably leave the key interest rate and bond-purchase program on hold this week, two surveys of economists by Bloomberg News show.

“Monetary policy should, in our view, provide some support to the economy, as low interest rates keep private-sector debt-servicing costs low, and the currency at competitive levels,” S&P said.

The yield on 10-year gilts fell 6 basis points to 2.37 percent as of 2:42 p.m. in London. The pound fell for a second day against the dollar, slipping 0.5 percent to $1.5507.

The U.K. suffered a credit-rating scare in 2009, when S&P lowered the outlook to “negative” amid concerns on the public finances. The outlook was restored to “stable” in October 2010, five months after the coalition government took office.

Osborne said agreements to prevent the euro-region debt crisis spreading beyond Greece would provide the single largest boost to the U.K. economy, saying the failure to find solutions was proving “debilitating.”