International ratings agency Standard and Poor's today downgraded its outlook on Britain's economy to 'negative' from 'stable' due to the country's deteriorating public finances.
The change may eventually lead to S&P's downgrading Britain's top-level sovereign credit ratings, the agency warned in a statement.
'The outlook revision is based on our view that, even factoring in further fiscal tightening, the UK's net general government debt burden may approach 100% of GDP and remain near that level in the medium term,' S&P said.
The UK public deficit ballooned to a record £8.5 billion sterling in April as the Labour government was forced to bail out ailing banks and recession slashes tax revenues, according to official data published today.
The data, together with S&P's downgrade, sent the sterling and stocks sliding in London, traders said. S&P said it had based its revision on its updated projections of general government deficits in 2009-2013.
'These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow,' S&P said.
S&P today maintained its sovereign credit ratings for Britain at 'AAA' long-term and 'A-1+' short-term. Both ratings signify the highest confidence that Britain will repay its borrowings.
However, the agency warned that the ratings could be lowered following Britain's next general election that must be held by mid-2010.
A downgrade of a credit rating can have significant consequences for a country, pushing up the interest rates demanded by savers to buy new debt, increasingly being issued to help cover soaring budget deficits.
Britain's recession-battered economy is shrinking at its fastest pace in almost 30 years. GDP contracted by 1.9% during the first three months of 2009 compared with a decline of 1.6% in the last quarter of 2008.
