By Xavier Fontdegloria
The series of large tax cuts and increased spending outlined by the U.K. government is fueling a confidence shock which could weaken debt affordability and the country’s credit profile, according to global ratings agency Moody’s.
The tax cuts are credit negative and will lead to structurally greater deficit, a weaker growth outlook and acute public spending pressure, the agency said in a report published Tuesday.
“A sustained confidence shock arising from market concerns around the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could also more permanently weaken the U.K.’s debt affordability,” Moody’s said.
U.K. Chancellor of the Exchequer Kwasi Kwarteng sparked a financial markets selloff by announcing the biggest tax cuts in a generation, at a cost of around 45 billion pounds ($48.3 billion) a year, in addition to new spending to freeze the rise in energy bills for households and businesses that is expected to cost GBP60 billion.
Increased borrowing, together with weakening economic growth, will push already elevated government debt on an upward trajectory in the coming years, Moody’s said.
“The measures… reflect the weakening predictability of fiscal policymaking that we have highlighted in recent years. Moreover, uncertainty around the government’s continuing compliance with its often revised fiscal rules weaken our assessment of policymakers’ forward-planning ability and their willingness or ability to deliver on the targets they set,” the agency said.
In the context of a sharp depreciation of the British pound and the spike in government bond yields, Moody’s said maintaining foreign-investor confidence may become increasingly important.
“A sustained confidence shock, accompanied by concerns around the government’s commitment to fiscal prudence and/or the central bank’s ability to contain inflation, could more permanently weaken debt affordability and the U.K.’s credit profile,” it said.
Write to Xavier Fontdegloria at [email protected]
