The UK’s credit rating was threatened with a downgrade on Friday night when S&P, one of the world’s biggest credit rating agencies, placed the country on a ‘negative outlook’ after the ‘mini’ budget of Chancellor Kwasi Kwarteng last week.
The rating agency maintained the UK’s double-A investment grade credit rating but warned the outlook was negative. S&P said after the Chancellor’s statement there were “additional risks” to lending to the UK.
The threat of a ratings downgrade will prove embarrassing to the Truss government just weeks after the new prime minister takes office. The “mini” budget caused the pound to fall and interest rates to rise because financial markets believed it would fuel inflation at a difficult time.
S&P said its decision was based on the budget statement and the government’s plan to “reduce a range of taxes in addition to its previously communicated intentions to extend broad support to households on energy bills.”
Rating agencies have lost some of their power since the 2008-2009 financial crisis, when they failed to warn of the risk of many complex products to which they gave top triple-A ratings. But their sovereign ratings are still closely monitored.
Most public finance experts have been more relaxed about the decision to spend billions on a temporary scheme to cut electricity and gas bills this winter than the permanent cuts to National Insurance and income tax. income, including the top rate, and the decision not to increase the main level of corporation tax.
Last week, the pound hit an all-time low against the US dollar, before recovering, the cost of government borrowing rose more than 0.5 percentage points, the Bank of England had to intervene to protect the pension system and mortgage lenders have withdrawn most fixed rate products from the market.
S&P has estimated that the UK’s budget deficit will rise by 2.6 percentage points of gross domestic product by 2025 as a result of the Kwarteng package, making it very difficult for the Chancellor to achieve his ambition to reduce public debt as a share of national income.
The rating agency said “general government net debt will continue on an upward trajectory, contrary to our previous expectation of a decline as a percentage of GDP from 2023.”
S&P said it still expected Britain’s economy to contract in the coming quarters, adding it was still unclear whether the government’s promises to cut borrowing stemming from spending cuts would materialize and be sufficient to put the debt back on a downward trajectory.
That would be particularly difficult, he added, against the backdrop of a weak global economy, rising interest rates hitting the housing market and shaky consumer sentiment.
With the government’s fiscal watchdog muzzled until the end of November, S&P predicts a tough time for the UK economy.
“We consider our updated budget forecast to be subject to additional risks, for example if UK economic growth proves weaker due to further deterioration in the economic environment, or if borrowing costs of government are increasing more than expected, driven by market forces and monetary policy tightening,” he said.