S&P boosts U.K. outlook, lauding cutbacks

October 26, 2010, 6:33 PM UTC

So far, austerity is working for the U.K.

Standard & Poor’s raised its outlook on the United Kingdom Tuesday to stable from negative. The move effectively removes any threat that the world’s sixth-biggest economy will lose its gold-plated triple-A credit rating in the next two years, barring unforeseen disaster.

Belt tightener

S&P said it boosted the U.K. outlook after the new coalition government led by Prime Minister David Cameron showed “a high degree of cohesion in putting the U.K.’s public finances onto what we view to be a more sustainable footing.”

Tuesday’s move comes a week after the government confirmed plans to cut spending by 19% over four years, costing some 500,000 public sector jobs. Cameron’s blueprint could  slash the U.K. budget deficit as low as 3% in 2014 from 11% last year, S&P said.

As recently as June, S&P was saying it expected the budget deficit to be 4% in 2014. But the rating agency noted that its deficit forecast remains above the government’s own. The U.K. Office of Budget Responsibility projects a 2.2% budget gap in 2014-2015.

S&P had cut the U.K. outlook in the spring of 2009, as the massive costs of cleaning up after the financial meltdown came to bear on its highly leveraged economy. Gross general government debt surged by 24 percentage points between 2007 and 2009

But the government’s commitment this year to cut spending “reduces uncertainties about its political resolve to tackle the challenges resulting from the structural deterioration in public finances between 2007 and 2009,” S&P said Tuesday.

S&P said the government’s actions mean the government debt ratio should peak at around 80% in 2013 and drop thereafter.

The S&P action hardly guarantees that the U.K. restructuring will work. Economists worry that the job cuts will sap consumer spending, weighing on demand for goods and services of all sorts and throwing the economy into another downturn that will inevitably lead to a vicious cycle of falling tax collections and additional spending cuts.

In the United States, the Federal Reserve is toying with another round of monetary stimulus in a bid to keep so-called aggregate demand for goods and services from falling too far.

Yet while the U.K.’s situation still seems dire, hawks have been cheered by the observation that many of the crises that seemed imminent across the Atlantic as recently as this spring haven’t materialized.

And whatever happens, Cameron’s willingness to sell the cutbacks to voters has drawn admiration from deficit hawks in the United States. In contrast, Congress and the Obama administration have shown little inclination to confront the consequences of America’s long-term profligacy, creating a leadership vacuum that seems in no danger of being filled any time soon.

“Cameron has shown real leadership in indicating that fixing the budget situation is worth risking losing office over,” writes Maya MacGuineas of the New America Foundation. “He is right. Would that a politician or two here in Washington be willing to show that kind of courage.”