LONDON, Sept 30 (Portal) – Rating agency Standard & Poor’s on Friday lowered the outlook for its AA credit rating on UK sovereign debt to negative from ‘stable’, believing Prime Minister Liz Truss’ tax cut plans could do so would result in the debt remaining rising.
Finance Minister Kwasi Kwarteng on September 23 announced permanent, unfunded tax cuts of around £45 billion ($50 billion) and costly temporary subsidies for household and business energy bills, sending sterling and bond markets into a tailspin brought.
While sterling has since recovered, the Bank of England was forced to launch an emergency bond-buying program on Wednesday to stabilize markets and has warned it is likely to have to raise interest rates significantly in November.
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S&P – which ranks UK public debt a notch higher than rivals Moody’s and Fitch – said it sees UK public debt on an upward trend, contrary to a previous forecast that it would fall as a percentage of gross domestic product from 2023 onwards.
“Our updated fiscal forecast is subject to additional risks, for example if the UK’s economic growth turns out to be weaker due to a further deterioration in the economic environment or if the government’s borrowing costs rise more than expected due to market forces and monetary tightening,” it added.
S&P forecasts that the UK will enter a technical recession in the coming quarters and its GDP will contract by 0.5% in 2023.
Truss and Kwarteng met with senior officials from the UK’s Office for Budget Responsibility on Friday but have so far dismissed calls from some investors and political rivals to ask the independent OBR to release new forecasts earlier than November 23 if Kwarteng intends to a debt relief plan.
Moody’s said on Wednesday that Kwarteng’s tax cuts were “credit negative” and has flagged Oct. 21 as the most likely next date for a more formal review.
The UK government said tax cuts and longer-term structural reforms in areas like immigration and building permits should boost growth, but S&P said the benefits were likely to be modest, particularly in the short term.
“At the moment it is unclear whether the government intends to eventually introduce fiscal consolidation measures to put the debt back on a downward path and we expect the package to be debt-funded,” it said.
UK public borrowing is expected to average 5.5% of GDP per year from 2023 to 2025, down from a previous forecast of 3%, while general government debt would rise to 97% of GDP by 2025, S&P forecasts.
($1 = 0.8961 pounds)
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reporting by David Milliken; Edited by Leslie Adler, Daniel Wallis and David Gregorio
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