A leading agency, Fitch, has suggested that the record levels of UK Government debt could soon affect the UK’s credit rating.  Should this happen it will impact everyone, a lower credit rating means higher interest charges on UK debt.

Let’s put some figures on this.  Assuming a total debt of £800bn then a 0.1% increase in interest rates would cost the UK economy £800m per year, a 0.5% increase would cost the economy £4bn per year.  Due to the size of public sector debt just a small increase in rates could have a very significant impact on the cost of borrowing.

Another impact of a reduction in the UK’s credit rating could be to further devalue the pound, as a large importer this would increase costs to the economy.  For example the still a net importer of goods (the trade deficit was reported to be £7.2bn), any further devaluation could increase this deficit and create future inflationary pressures.

But all is not lost, the UK’s credit rating has not yet been affected, according to the leading agency reports (Fitch, Standard & Poor) much will depend on how the UK manages its debt, and in particular the disciplines that will be put in place to reduce the overall debt burden.