LONDON, Oct 5 (Reuters) – Rating agency Fitch lowered the outlook for its credit rating on Britain’s sovereign debt to negative from stable on Wednesday, days after a similar move by rival Standard & Poor’s following the government’s June 23 fiscal year September statement.
“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.
Fitch maintained its ‘AA-‘ UK credit rating, one notch below S&P.
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Finance Minister Kwasi Kwarteng announced £45 billion ($51 billion) of unfunded tax cuts in the September 23 statement, along with big energy subsidies and other measures to boost growth, but financial markets balked at the additional borrowing .
Sterling fell to record lows against the US dollar and some UK government bonds fell at their worst in decades, forcing the Bank of England to step in to stabilize markets.
Fitch said the lack of independent fiscal forecasts, as well as an apparent conflict with the BoE’s anti-inflation strategy, had “negatively impacted financial market confidence and the credibility of the policy framework, a key long-standing ratings strength”.
On Monday, Kwarteng said he would not implement some of the tax cuts – cutting income tax for the top 1% of earners – which the Treasury estimates would cost the Treasury at £2 billion a year.
Fitch said that wasn’t enough to change his broader assessment.
“Although the government has reversed the abolition of the 45p top tax… the government’s weakened political capital could further erode credibility and support for the government’s fiscal strategy,” Fitch said.
The rating agency forecasts that the UK general government deficit will reach 7.8% of gross domestic product (GDP) this year and 8.8% in 2023, while general government debt will rise to 109% of GDP by 2024.
($1 = 0.8833 pounds)
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reporting by David Milliken; additional reporting by Arunima Kumar in Bengaluru; Edited by Shailesh Kuber and Grant McCool
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