Fitch on Wednesday reaffirmed the UK’s rating at AA, changing the outlook from stable to negative. In a statement, the credit rating agency said the change in outlook reflects the tax cut effort and higher budget deficit. In his view, the large, unfunded fiscal package announced as part of Prime Minister Liz Truss’s new government growth plan could lead to a significant increase in the fiscal deficit in the medium term.
Without compensatory measures, the fiscal deficit is projected to be 7.8% of GDP in 2022 and 8.8% in 2023, before falling to 7.2% in 2024. “Expenditure pressures will remain strong in the short term due to higher inflation, for example through the indexation of benefits and pensions, and due to structural factors in sectors such as education, social assistance or healthcare”, Fitch assesses.
The change in the fiscal path will raise the deficit to 109% of GDP by 2024 from an estimated 101% in 2022, reflecting both higher primary deficits and weaker growth prospects, the agency says. Government bond yields have risen significantly in recent months, reflecting higher interest rates and uncertainty about fiscal strategy, he recalled.
Large fiscal stimulus announced without independent assessment of compensatory measures or macroeconomic impact and public finances and the discrepancy between fiscal and monetary policy stance in the face of strong inflationary pressures, in Fitch’s view, negatively affected financial markets. Moreover, it undermined the trust and credibility of the long-standing ranking power of the policy framework.
