The UK’s delicate balancing act …

Standard and Poor’s recently reaffirmed the UK’s AAA rating, but with a caveat — “”The ratings could come under downward pressure if, against our expectations — and perhaps in response to weakening growth prospects — the coalition government’s commitment to fiscal consolidation falters,”

The chart above shows UK tax revenue, net debt and net debt as a % of UK GDP. Currently debt is running about 72% of GDP and is forecast to peak at 78% in 2013. But that figure is deceptive, as it doesn’t include the cost of financial sector intervention. Including that cost would result in what’s called “unadjusted measure of public sector net debt”, and the current year debt to GDP ratio would skyrocket to 148%.

Of course with the Eurozone crisis, the fact that roughly 41 out of 89 Eurozone banks that we are tracking technically insolvent and the strong deflationary pressure the global economy is facing, Cameron and the UK will be walking a tightrope at the upcoming EU Summit.

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