France lost it’s AAA credit rating last week following a downgrade by ratings agency Moody’s. The news came in light of France’s vulnerability to the Eurozone debt crisis and concern over whether high labour costs will stifle France’s economic recovery. Many fear that the UK will be next in line to be stripped of it’s AAA credit rating.
The UK economy has been in recession for 5 years and has undergone very low levels of growth despite several attempts by the Bank of England to pump money into the system in the form of Quantitative Easing (QE). The QE program has not worked as the cash has not filtered down to small businesses to enable growth. The economy is now at risk of inflation which can already be seen in the form of higher prices filtering into the system. Fuel and food prices in particular have been rising whilst wages are being squeezed.
The UK is saddled with high levels of debt and will risk losing it’s credit rating unless a credible plan is put in place. Last month’s news that the government is spending more than it is collecting in taxes is of particular concern, hence the recent outcry against large multinationals such as Starbucks who are not paying their fare share of taxes in the UK.
We expect that the UK will embark on several new infrastructure and housing projects in order to provide added stimulus to the market. However, this is unlikely to be provide a significant long term solution to the budget deficit. The HMRC will continue to target tax avoidance but we feel it is unlikely that they will employ any meaningful transfer pricing policies in the near future to bring the large multinationals onto a level playing field with domestic businesses.