In the Autumn Statement last week, the Office for Budget Responsibility forecast austerity until 2018, three years after chancellor George Osborne promised to eliminate the deficit.
The OBR predicts Osborne will also miss his second fiscal target of falling national debt by 2015. It also cut growth projections for each of the next five years, predicting more public borrowing and a higher than expected deficit.
In response, Fitch Ratings warned the missed targets could see the UK lose its AAA rating early next year. In March, the ratings agency put the UK on “negative watch”.
Moody’s says it plans to review the UK’s rating early next year.
Osborne has placed huge importance on retaining the UK’s AAA rating, but now says it is only “one of a number” of ways to measure a countries’ performance.
Tory MP for Clacton Douglas Carswell says a downgrade is “inevitable” and borrowing costs will rise because of growing debt.
He says: “Credit rating agencies said if we failed to stick to our targets we would be downgraded. We have failed to stick to our deficit reduction targets so it is inevitable that we will be downgraded in the new year.
“Our chancellor set great store that we would keep our AAA rating. In terms of market sentiment it is probably not important but in terms of politics it raises a few question marks.”
Tory MP for Wycombe Steve Baker says: “It is amazing how quickly the debate has moved to people claiming the rating does not matter.
“I would not be at all surprised to see a wave of downgrades across the western world, but that is not to take away from the chancellor playing a difficult hand well.”
But Treasury select committee member and Tory MP for Braintree Brooks Newmark does not expect a downgrade.
He says: “At the moment the agencies think we are doing as much as we can and there is no sense we will be punished.”