Second rating agency cuts UK outlook in wake of mini-Budget

The UK’s credit rating came under further threat on Wednesday as Fitch put the country on a “negative” outlook while giving a damning verdict on the government’s fiscal policy and political credibility.

The rating agency maintained the UK’s AA- investment grade but warned that the outlook was now negative rather than stable, mirroring the action taken last week by its peer S&P.

Fitch said the large, unfunded tax cuts announced as part of the government’s mini-Budget — without any independent evaluation of their impact — could lead to a significant increase in deficits in the medium term, while creating an immediate tension between monetary and fiscal policy given high inflation. This had hit market confidence and the credibility of the policy framework.

The rating agency’s statement made it clear that the U-turn the government made this week, scrapping its plan to abolish the 45p top rate of income tax, would not be enough to repair the damage done by its initial announcements, and by chancellor Kwasi Kwarteng’s subsequent hints that he was minded to cut taxes further while changing fiscal rules that had been set only in January.

Instead, the poor reception that the measures had been given by voters and investors alike would make it harder for ministers to pursue any course, the agency argued. “The reportedly negative impact of the tax package, and the related financial market volatility, on public opinion and the government’s weakened political capital could further undermine the credibility of and support for the government’s fiscal strategy.”

Credit rating agencies have lost some of their power since the 2008-09 financial crisis, when they failed to warn of the risk in many complex products they had given triple-A ratings. But their sovereign ratings are still closely watched.

Fitch issued its statement just hours after UK prime minister Liz Truss sought to reassure financial markets that she was committed to fiscal discipline, pledging at the Conservative party conference to keep an “iron grip” on public finances and bring down debt as a proportion of national income.

But the rating agency underlined the difficulties the chancellor will face in convincing markets that he can pay for his tax cuts through either stronger growth or lower public spending.

The government had not yet explained how it would tackle the long-term structural challenges holding back growth, it said, and spending pressures would remain strong, because of high inflation in the near term and longer-term strains on education, health and social care.

Fitch estimated that without measures to offset the tax cuts, the UK’s government deficit would rise to 8.8 per cent of GDP in 2023 — compared with the average of 2 per cent for other country’s with similar credit ratings. Government debt would rise to 109 per cent of GDP, and interest payments on government debt would be almost 10 per cent of government revenues in 2024.

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