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Britain's Debt Omen
A warning about America's fiscal future.For a warning about America's fiscal future, consider yesterday's news from Britain. United Kingdom stocks, bond futures and sterling all fell after Standard & Poor's lowered the country's credit outlook. U.S. shares and the dollar also fell on the U.K. news. Citing concerns about the ballooning public debt, S&P said it may downgrade the U.K.'s top-level sovereign credit ratings if the government doesn't get its finances under control. Chancellor of the Exchequer Alistair Darling forecast last month that the country's debt will rise to 59% of GDP in fiscal 2009-10 from 51.9% last year, peaking at 79% in 2013-14. But S&P considers these numbers too optimistic. "Even factoring in further fiscal tightening, the U.K.'s net general government debt burden may approach 100% of GDP and remain near that level," S&P credit analyst David Beers said. "A government debt burden of that level, if sustained, would in S&P's view be incompatible with a 'AAA' rating." Humiliation aside, a downgrade would further damage Britain's public finances and the economy as interest rates and borrowing costs rose. S&P is hardly the last word on national finances, and in our view the credit raters worry too much about debt per se as opposed to economic growth. They tend to take too negative a view of tax cuts, for example. But in both the U.K. and U.S. today, the politicians in power equate government spending with growth. So on present course, Britain's credit future could well be America's in the coming years as U.S. spending soars. Even the White House concedes that U.S. debt held by the public as a share of GDP will hit 70% in fiscal 2011, by far the highest level since 1951 and up from 40.8% in 2008, before declining. (See nearby chart.) But that forecast beyond 2011 depends on very rosy assumptions about renewed growth and future spending restraint. The dollar's standing as the world's reserve currency gives the U.S. somewhat more protection against losing its AAA rating. But the world's creditors are making their own judgments about U.S. fiscal credibility on a daily basis, and those judgments will show up in the value of the dollar and the yields on Treasury debt. Those investors didn't like what they saw yesterday, perhaps because they think the British are showing where out-of-control spending leads. Posted by: Steve White 2009-05-22 |
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