LONDON – S&P Global Ratings on Friday lowered its outlook for the UK government debt, citing risks to the country’s economy stemming from the government’s recently announced tax cut plans.
The rating agency changed its outlook from stable to negative, saying the “measures could weaken the UK’s fiscal position” as they could increase the government’s borrowing costs and make it more difficult for the country to tame inflation. At the same time, S&P affirmed the UK’s double-A credit rating.
The government of new Prime Minister Liz Truss announced on September 23 the country’s biggest tax cuts since the early 1970s. The announcement immediately triggered a market meltdown, sending the pound to a new low against the dollar and sending government bond yields higher. The Bank of England was forced to intervene in the bond market on Wednesday to stem a liquidity crisis hitting the country’s pension funds.
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The rating agency’s dour assessment was the latest blow to the UK’s once-stellar reputation for financial management. International Monetary Fund officials criticized Britain last week.
A negative outlook is often, but not always, a precursor to an actual downgrade. With the UK still several notches away from a speculative or junk rating, a downgrade is unlikely to have a significant impact on investors. Some large insurance and pension companies are not allowed to own classified debt.
S&P’s rival Moody’s said last week the tax plan was “credit negative” but did not officially lower its outlook or change its rating.
Bond markets have moved sharply to reflect the UK’s new spending plans. Borrowing costs for the UK government remain significantly higher than before the tax plan was unveiled, although they fell slightly on Friday.
The ratings agency expects government debt to continue to rise over the next two to three years, reversing its previous expectation of a decline from 2023 onwards.
According to the Organization for Economic Co-operation and Development, the UK economy is expected to record zero growth next year, the third lowest rate in the group of top 20 economies after Russia and Germany.
S&P said it may have to make further updates to its forecast if the country’s economic growth turns out to be weaker than expected or if borrowing costs rise due to market forces and central bank actions.
Write to Julie Steinberg at [email protected]
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