Osborne Warned U.K. Rating at Risk as Budget Gap Widens

Chancellor of the Exchequer George Osborne faced renewed warnings that Britain risks losing its top credit rating after the budget deficit widened last month as a struggling economic recovery weighed on company profits.

The shortfall excluding government support for banks was 15.4 billion pounds ($24.4 billion) compared with 14.8 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 23 estimates in a Bloomberg News survey was for a deficit of 15.2 billion pounds. Spending rose 5.4 percent and revenue climbed 3.6 percent.

Standard and Poor’s last month became the third ratings company to warn that Britain could be stripped of its top-notch ranking after Osborne conceded it is taking longer than planned to repair the public finances. Investors often ignore such actions, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.

“The fiscal position is likely to drift further off course as the U.K. veers towards a triple-dip recession,” said Rob Wood, an economist at Berenberg Bank in London and a former Bank of England official. “There is only so long that the chancellor’s combination of smoke and mirrors and optimistic growth assumptions can disguise the problem.”

Investors are demanding more yield to hold U.K. government debt, pushing borrowing costs to an eight-month high. Ten-year gilt yields touched 2.14 percent on Jan. 4, the most since April 30. They were down 2 basis points at 2.04 percent at 2 p.m. in London, paying 18 basis points more than similar-maturity U.S. Treasuries. The rate was 17 basis points below Treasuries as recently as August. The pound gained 0.2 percent against the dollar to $1.5861.

S&P Warning

S&P said last month there is a one-in-three chance it will cut its AAA rating in the next two years after joining Fitch Ratings and Moody’s Investors Service in downgrading Britain’s outlook to negative.

Such a move would be embarrassing for Osborne and Prime Minister David Cameron, who have made the top rating a badge of creditworthiness that separates Britain from debt-strapped euro-area nations such as Spain, although it may have little market impact.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published on Dec. 17. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

‘Mounting Expectations’

“Overall, the December public finance data do little to dilute high and mounting expectations that at least one of the credit rating agencies will strip the U.K. of its AAA rating within the next few months,” said Howard Archer, an economist at IHS Global Insight in London.

Corporation-tax receipts rose 0.2 percent in December from a year earlier and were down 7.1 percent in the fiscal year to date, reflecting the impact of weak growth on company profits and shutdowns of North Sea oil and gas production.

Spending was boosted largely by a 6.5 percent increase in departmental outlays last month. Welfare costs increased 3.3 percent. Net investment was little changed at 2.4 billion pounds.

‘Overly Aggressive’

The deficit climbed to 106.5 billion pounds in the first nine months of the fiscal year from 99.3 billion pounds a year earlier, despite downward revisions to borrowing between April and November. The figures exclude a one-time boost from the 28 billion-pound transfer of Royal Mail Group Ltd. pension assets to the public sector in April last year. The Treasury’s fiscal watchdog, the Office for Budget Responsibility, predicts an underlying deficit of 120 billion pounds for the full fiscal year.

The report sparked new accusations that Osborne is trying to cut the deficit too quickly and stifling growth in the process. The economy probably shrank 0.1 percent last year and will grow just 1.1 percent this year, according to a survey of economists published on Jan. 17.

Former Bank of England policy maker Adam Posen told lawmakers in London today the government’s austerity program is “overly aggressive.” Rachel Reeves, a Treasury spokeswoman for the opposition Labour Party, said budget cuts are hurting, not working.

Failing Test

Osborne and Cameron are “failing on the one test they set themselves -- to get the deficit and debt down,” she said in an e-mailed statement. “This is borrowing to pay for economic failure as a flat-lining economy and rising long-term unemployment have sent the welfare bill soaring and tax revenues have been revised down.”

In his autumn statement, Osborne said austerity will continue until 2018, three years later than planned when his Conservative-led government took office in 2010 vowing to tackle a budget deficit of more than 11 percent of gross domestic product.

Detailed spending plans have been set out through March 2015 and Osborne told Cabinet colleagues today to begin the process of finding savings for the following year, warning of the need for difficult decisions. A new spending review covering the period is due to be announced in the first half of 2013.

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