US Credit Rating Agency has lowered UK Debt Outlook from ‘stable’ to ‘negative’.
United States rating agency Fitch lowered the outlook for its credit rating for UK government debt from “stable” to “negative” on Wednesday, citing fallouts from Prime Minister Mz Liz Truss’ take on “mini-budget fiasco.”
Flitch changed its rating for the British government debt outlook, stating, “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.
Highlights:
- Flitch switched its UK government debt outlook from “Stable” to “Negative.”
- Kwarteng won’t go ahead with scrapping the top 45p income tax rate.
- Sterling sold at 2.01 percent against the US dollar after Ms. Truss’s speech.
- UK’s general government deficit is forecasted to reach 7.8% of GDP this year and 8.8% by 2023.
Who Is Flitch?
Fitch Ratings, simply referred to as Flitch, is an American credit rating agency with dual headquarters in New York and London. The US firm is among the top three rating agencies globally. Flitch rates the feasibility of monetary investments relative to the likelihood of default.
What Flitch’s New Rating For UK Government Debt Outlook Implies
Of course, the rating doesn’t mean well and could lead to a noticeable “increase in fiscal deficits over the medium term,” as stated by Flitch. The downgrade by Flitch is a follow-up action to Chancellor Kwasi Kwarteng’s “unfunded fiscal package” and Prime Minister Mz Liz Truss’ speech on the “mini-budget fiasco.”
Also, Flitch’s position on the British government debt outlook follows a similar move by its top competitor – also an American credit rating agency (CRS) – Standard & Poor’s (S&P’s). Flitch’s new rating of the UK govt. debt “AA-“ is a notch lower than S&P’s rating. The negative rating is chiefly due to the UK government’s “weakened political capital.”
Scenarios That Led To The UK Credit Outlook Downgrade Saga
- On 23 September 2022, the UK chancellor, Kwasi Kwarteng, mentioned about £45bn of unfunded tax cuts, large energy subsidies, and other measures to influence the UK government’s debt positively. However, financial markets pulled back at the extra borrowing required.
- The Great Britain Pound fell to a record low against the US dollar, while some British government bonds dipped to unimaginable low records.
- The Bank of England (BoE) and other top UK banks tried to help the situation by purchasing up to £65billion in government debt in an attempt to stabilize the markets, boost confidence, and prevent pension funds from collapsing. Still, it didn’t seem to work out as expected.
Fitch mentioned that the lack of independent budget forecasts and following the clash with the BoE’s inflation-fighting strategy had “negatively impacted financial markets’ confidence and the credibility of the policy framework, a key longstanding rating strength.”
Aftermaths
UK Chancellor Kwarteng said he wouldn’t proceed with the tax cuts – scrapping the top 45p income tax rate, which was estimated to cost the Treasury £2bn annually, but Fitch insists that this isn’t enough to have it change its UK credit rating.
Flitch’s forecasts show that UK’s general government deficit would reach 7.8% of GDP this year and 8.8% in 2023, and general government debt could reach a record 109% of GDP by 2024.
Reference: TheGuardian
