Fitch downgraded the UK’s credit outlook late on Wednesday, citing the government’s recently-announced mini-budget.
The outlook was cut to “negative” from “stable”. Fitch said: “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.”
The ratings agency maintained its AA- credit rating for the UK. This is one notch lower than Standard & Poor’s.
Fitch said the change in fiscal trajectory will push general government debt to 109% of GDP by 2024 from an estimated 101% in 2022, reflecting both higher primary deficits and a weaker growth outlook. “This level would be more than double the forecast ‘AA’ median of 49%,” it said.
It also noted the recent surge in government bond yields, saying this reflects higher interest rates and uncertainty over the fiscal strategy.
Fitch said the government deficit will remain elevated at 7.8% of GDP in 2022 and increase to 8.8% in 2023, due to the impact of high inflation on index-linked government debt, household support, the energy price cap and tax cuts, before easing to 7.2% in 2024. This compares with deficits projected to average 2% for the ‘AA’ median, it noted.
The ratings agency also said that although the government reversed the scrapping of the 45p top rate tax, “the reportedly negative impact of the tax package, and related financial market volatility, on public opinion and the government’s weakened political capital could further undermine the credibility of and support for the government’s fiscal strategy”.
Fitch expects the UK economy to contract next year despite the energy tariff support and proposed tax cuts. “In addition to the energy crisis and weaker external demand (including contraction in the eurozone), the likely tighter domestic financing conditions will lead to a contraction of 1.0% in 2023 before growth recovers to 1.8% in 2024,” it said.