Ratings agencies have downgraded the UK’s credit outlook to ‘negative’ after last month’s “mini” Budget spooked financial markets and the pound’s value plummeted.
S&P Global and Fitch have both revised the outlook on the UK’s default rating from stable to negative.
In a statement last week (October 5), Fitch highlighted that the lack of independent economic forecast alongside the Budget as well as the “inconsistency” between fiscal and monetary policy have negatively impacted markets’ confidence in the UK.
The chancellor decided not to release an economic forecast from the Office for Budget Responsibility alongside the “mini” Budget, as is normal, prompting concern from MPs.
The “mini” Budget will also push government debt to 109 per cent of gross domestic product by 2024, from an estimated 101 per cent in 2022, Fitch said, reflecting both a higher borrowing deficit and a weaker growth outlook.
Last month (September 30), S&P maintained the UK’s double investment grade credit rating but warned that the outlook for the country was negative, saying that lenders to the UK face “additional risks”.
Both agencies predict a contracting of the UK's economy, with Fitch expecting a slowdown of 1 per cent in 2023 before growth recovers to 1.8 per cent in 2024.
The agencies rate sovereign’s credit risk, which is the likelihood of a borrower being unable to repay a loan or meet contractual obligations.
In the Budget, announced on September 22, chancellor Kwasi Kwarteng announced a raft of measures aimed at stimulating growth in the UK.
These £45bn in tax cuts included abolishing the 45p higher income tax rate, which has since been reversed, as well as scrapping the health and social care levy and a cut in the basic tax rate of 1p in the pound.
This prompted a surge in the yields on gilts, a crash in the value of the pound, and eventually led to emergency intervention by the Bank of England in an attempt to prevent pension funds facing huge margin calls.
The IMF then warned the UK that it should re-evaluate these tax cuts, saying they are likely to cause higher inflation and inequality.