Fitch drops UK credit outlook to ‘negative’ on tax cut plans
Fitch has downgraded the UK’s government debt rating to “negative” from “stable” following the mini-budget.
The ratings agency warned that the “large and unfunded fiscal package” could lead to a significant increase in the government’s deficits over the medium term.
"The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term," Fitch said Wednesday night.
The credit rating agency’s decision follows a similar move from S&P.
Read more: UK households lose £2 in 'stealthy' freezes for every £1 in tax cuts
Fitch maintained its "AA-" credit rating for the UK, which is one notch lower than S&P's.
The ratings agency said the lack of independent budget forecasts, as well as an apparent clash the Bank of England’s strategy to curb inflation had “negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength”.
Chancellor Kwasi Kwarteng has reversed the government's original plan of scrapping the 45% income tax rate for top earners, but Fitch said this was not enough to change its assessment.
“Although the government reversed the elimination of the 45p top rate tax (expected to cost £2bn in FY22-2023, the negative impact of the tax package, and 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.”
Fitch has also warned that the UK’s economy will shrink next year, despite the mini-budget.
The ratings agency forecast the UK’s general government deficit would reach 7.8% of gross domestic product (GDP) this year and 8.8% in 2023, while general government debt would rise to 109% of GDP by 2024.
Political uncertainty is also weighing on the UK as it might limit Liz Truss’s options.
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"The new government of prime minister Liz Truss has sought to assuage concerns regarding transparency and institutional independence after comments about potential revisions to the BoE’s mandate during the Conservative leadership contest and the roll-out of a large fiscal package without the involvement of the Office of Budget Responsibility,” Fitch said.
“Reduced popular support for the ruling Conservative Party, the social impact of the cost of living crisis and increased frequency of strikes could constrain the new prime minister’s room for manoeuvre,” it added.
Meanwhile, Goldman Sachs has warned that the underlying source of volatility in UK markets remains unresolved and risks sparking turmoil in gilts again.
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