UK Debt Outlook Remains Negative at Fitch in Setback for Sunak

(Bloomberg) -- Fitch Ratings maintained its “negative” credit outlook on the UK in a fresh setback for Prime Minister Rishi Sunak.

In a statement Friday, the credit assessor said the negative outlook reflects uncertain prospects for fiscal consolidation. It means the UK remains at risk of losing its AA- rating, a high-quality mark it shares with the likes of France, South Korea and Ireland.

There had been hopes that Fitch would follow Moody’s Investors Service, which only a month ago raised its UK outlook to stable from negative, saying “policy predictability” had been restored after the disastrous mini budget last year.

Fitch’s decision will be disappointing for Sunak, who is under mounting pressure from his own Conservative Party after failing to shift the dial in opinion polls that put the Labour opposition on course to win an election expected next year.

UK’s outlook was cut by Fitch in October last year after then-Prime Minister Liz Truss unleashed turmoil on financial markets by announcing an unfunded £45 billion package of tax cuts.

Fitch projects UK growth of 0.5% in 2023, and said it expect that a mild recession will pull down annual growth to 0.3% in 2024 before recovering to 1.8% in 2025. The general government fiscal deficit will reach 5.4% of GDP in 2023.

Sunak, her successor, took action to steady the public finances but he has struggled to cut through with voters, who blame him for presiding over a rising tax burden and record levels of migration.

Fitch’s decision offers a judgment of sorts on Chancellor of Exchequer Jeremy Hunt’s Autumn Statement last week.

In a bid to boost the Tories, Hunt announced the biggest tax cuts since the 1980s, including a £10 billion cut to payroll taxes. However, the giveaway is fraction of the amount the government is taking from workers by freezing income-tax thresholds between 2022 and 2028.

Overall, the budget deficit falls by 2 percentage points of GDP over the next two years, according to the fiscal watchdog, but there are doubts over whether the government can deliver on its commitment to cut debt as a share of GDP in five years.

Britain is facing among the slowest-growth rates of any Group of Seven economy and the government may find it hard to stick to its public-spending plans, which have been widely described as implausibly tight.

Another negative for the public finances is the cost of servicing the £2.7 trillion national debt, a quarter of which is linked to the rate of RPI inflation. High inflation and interest rates mean government debt costs are now forecast to exceed £100 billion a year, a threefold increase since 2016.

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Author: Andrew Atkinson