NEW YORK/LONDON Fitch Ratings revised down its outlook on Britain's AAA rating to negative on Wednesday, warning the nation could lose its top-notch status in the next couple of years if the government eases back on its debt cutting stance.
The Fitch action, which comes just a week before British finance minister George Osborne presents his annual budget to parliament and follows a similar move by Moody's just a month ago, is likely to dampen calls for the government to loosen its fiscal stance.
"This is a salutary reminder as to why Britain needs to deal with the enormous debts and deficit that we inherited, why we have got to stick to those plans," said British Treasury minister Danny Alexander.
"And it should be a wake-up call to anyone who thinks we can afford as a country to loosen the purse strings. We can't afford to do that, and that is why there will be no unfunded giveaways in next week's budget."
Britain's Conservative-led coalition government has staked its reputation on plans to virtually eliminate a budget deficit that was at a record 11 percent of gross domestic product when it came to power two years ago.
However, progress has been slow due to a faltering domestic economy and weak demand in the euro zone, Britain's biggest trading partner, forcing the government to admit that it will take two years longer than planned to meet its deficit goal.
Osborne has insisted there will be no unfunded giveaways in the March 21 budget, but he has been coming under growing pressure from members of his own Conservative party, as well as from the Liberal Democrat party to find ways to boost demand and kick-start Britain's lacklustre economic recovery.
The measures being demanded by fellow lawmakers include raising the threshold at which income tax is paid to alleviate the squeeze on middle-income families, and cutting corporation tax to encourage firms to invest and create jobs.
Britain's Office for Budget Responsibility forecasts that public sector net debt will peak at 78 percent of GDP by 2014/15 but fall thereafter, and Fitch said that although this was consistent with its own forecast for Britain, it was at the limit of the level consistent with a triple-A rating.
"The revision of the rating outlook to negative reflects the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels," Fitch said in a statement.
"In light of the considerable uncertainty around the economic and fiscal outlook, including the risks posed to economic recovery by ongoing financial tensions in the euro zone and against the backdrop of a still large structural budget deficit and high and rising government debt, the Negative Outlook indicates a slightly greater than 50 percent chance of a downgrade over a two-year horizon," Fitch said.
And it said that the triggers for a downgraded included "discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast."
(Reporting by Walter Brandimarte and Fiona Shaikh; Editing by Diane Craft)