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Financial Planning > Tax Planning

Fitch Cuts U.K. Outlook

By Marlene Y. Satter

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Fitch Ratings has downgraded the outlook for Britain after saying that the nation could lose its AAA rating because of a limited ability to deal with financial shocks. The move comes just days before the annual budget is to be revealed.

Bloomberg reported that Fitch took the action late Wednesday, changing the U.K.’s long-term outlook from stable to negative, which indicates a chance “slightly greater” than 50% that its AAA rating will be reduced within two years. In its statement, the ratings agency cited the ongoing threat from the euro zone debt crisis, Britain’s weak economic recovery and high debt levels.

In its statement, Fitch said its action “reflects the very limited fiscal space to absorb further economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery.”

Chancellor of the Exchecquer George Osborne, who is due to present his budget for the year on March 21, has been aggressively cutting government spending to address the country’s deficit—the deepest restrictions imposed since World War II. However, those cuts have been weighing on the country’s recovery.

Business Secretary Vince Cable has been outspoken in his quest for more action to support the British economy, and has said his Liberal Democrat party is willing to discard the current 50% top tax rate as long as Conservatives agree to tax the wealthy more aggressively. One proposal is a “mansion tax” on the most expensive properties. Deputy Prime Minister Nick Clegg has said he would propose a “tycoon tax” on those who earn the most.

The move by Fitch will provide the Labour Party a means of attacking Osborne for his austerity drive; they say it puts Britain at risk for entering another recession in less than three years.

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