Moody’s has signalled there is a possibility it will downgrade the credit rating on government debt amid an “erosion in institutional strength” caused by Brexit.
The ratings agency has changed the outlook on its Aa2 rating of the UK’s debt from “stable” to “negative”, implying a rating cut could be imminent.
The current Aa2 rating is on par with France but below Germany’s AAA rating.
A downgrade would be a blow for Sajid Javid just a day after the Chancellor announced new fiscal rules with the goal of keeping public finances in check after the general election.
The ratings agency said “no matter what the outcome is of the general election Moody’s sees widespread political pressures for higher expenditures with no clear plan to increase revenues to finance this spending”.
Moody’s said tackling high borrowing levels were not likely to be a part of either the Conservative or Labour election campaigns, with both parties pledging big spending increases.
Brexit to blame
The agency added the uncertainty around Brexit and and effects of the leaving the European Union would be long-lasting.
“It would be optimistic to assume that the previously cohesive, predictable approach to legislation and policymaking in the UK will return once Brexit is no longer a contentious issue, however that is achieved,” a statement read.
It also noted that the economy might be “more susceptible to shocks than previously assumed” with the risk of Britain’s £1.8trn worth of debt rising again.
“In the current political climate, Moody’s sees no meaningful pressure for debt-reducing fiscal policies.”
Britain’s AAA rating was downgraded in 2012 despite former chancellor George Osborne pledging to maintain it.
Moody’s said the reason for a change in its outlook was because “UK institutions have weakened as they have struggled to cope with the magnitude of policy challenges that they currently face, including those that relate to fiscal policy”.
The agency also added that “the UK’s economic and fiscal strength are likely to be weaker going forward and more susceptible to shocks than previously assumed”.