The UK’s credit rating was threatened with a downgrade late Friday when S&P, one of the world’s largest credit rating agencies, put the country on a “negative outlook” after Chancellor Kwasi Kwarteng’s “mini” budget last week.
The rating agency maintained the UK’s double A rating for investment grade, but warned the outlook was negative. S&P said there were “additional risks” in lending to the UK following the Chancellor’s statement.
The threat of a rating downgrade will embarrass the Truss administration just weeks after the new prime minister takes office. The ‘mini’ budget caused the pound to fall and interest rates to rise as financial markets believed it would fuel inflation in a difficult time.
S&P said its decision was based on the tax statement and the government’s plan to “cut a range of taxes in addition to previously communicated intentions to broadly support households on energy bills.”
Credit rating agencies have lost some of their power since the 2008-09 financial crisis, when they failed to warn about the risk in many complex products that had given them the highest triple A ratings. But their sovereign ratings are still closely watched.
Most public finance experts have been more relaxed about the decision to spend billions this winter on a temporary scheme to keep electricity and gas bills low than the permanent cuts in national insurance and income tax, including the top rate, and the decision not to raise the main level of corporate income tax.
Over the past week, the pound has hit an all-time low against the US dollar before recovering, government borrowing costs have risen by more than 0.5 percentage points, the Bank of England has had to intervene to boost the pension system and mortgage protect lenders have withdrawn most fixed income products from the market.
S&P estimated that the UK budget deficit would increase by 2.6 percentage points of gross domestic product by 2025 as a result of Kwarteng’s package, making it very difficult for the chancellor to achieve his ambition to include public debt as a share of the economy. reduce national income.
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The rating agency said that “net government debt will continue to rise, contrary to our previous expectation that it will decline as a percentage of GDP from 2023.”
S&P said it still expected the UK economy to contract in the coming quarters, adding that it was still unclear whether government promises of lower borrowing through spending cuts would materialize and be enough to bring debt back to a descending path.
This would be particularly difficult, it added, in the context of a weak global economy, rising interest rates hitting the housing market and shaky consumer confidence.
With the government’s fiscal watchdog muzzled until the end of November, S&P predicted a difficult period for the British economy.
“We believe that our updated fiscal forecast is subject to additional risks, for example if UK economic growth weakens due to a further deterioration in the economic environment, or if government borrowing costs rise more than expected, driven by market forces and monetary tightening of policy’, according to the minister.