Ratings agency Moody’s downgraded the UK's credit rating by a further notch on Friday over concerns about the public finances and fears Brexit could damage the Britain’s economic growth.
The agency said that the government’s plans to fix the public finances had been knocked off course and Brexit would weigh on the economy, reports Reuters.
A few hours after the UK Prime Minister Theresa May set out plans for a new relationship with the European Union, Moody’s cut the rating to Aa2 from Aa1, underscoring the economic risks that leaving the bloc poses for the world’s fifth-biggest economy.
Britain has worked down its budget deficit from about 10 per cent of economic output in 2010, shortly after the global financial crisis hammered the country, to 2.3 per cent in the most recent financial year which ended in March.
But Moody’s said the outlook for public finances had weakened significantly as May’s government increasingly put into question the austerity push pursued by former prime minister David Cameron and his finance minister George Osborne.
The government responded by saying Moody’s assessment of the Brexit hit to the economy was “outdated” and that May had set out an “ambitious vision for the UK’s future relationship with the EU” in a speech earlier on Friday.
The Moody’s downgrade was made after a meeting with the government on Sept. 19 and did not reflect May’s speech on Friday, the government said.
Nonetheless, Moody’s verdict on Britain’s public finances will make for grim reading for May and her finance minister Philip Hammond.
After seven years of austerity, the government was coming under pressure to ease its squeeze on public finances and a recent relaxation of a tight public sector pay cap for police and prison workers was likely to be broadened, Moody’s said.
Furthermore, a deal struck by May with a small political party in Northern Ireland after she lost her parliamentary majority in June’s election and the dropping of plans to review costly pension increases would also weigh on the public purse.
“Overall, Moody’s expects spending to be significantly higher than under the government’s current budgetary plans,” Moody’s said.
On the tax side, it noted how the government abandoned a controversial plan to raise national insurance contributions for self-employed workers and was reliant on “highly uncertain revenue gains from tackling tax avoidance to fund tax cuts”.
As a result, the budget deficit was likely to remain at around 3-3.5 percent of GDP in the coming years, higher than the government’s plans to cut it below 1 percent of GDP by 2021/22.
That meant Britain was one of the few big European economies where the public debt ratio was likely to rise, probably peaking at about 93 percent of GDP in 2019, two years later than under the latest government plans.