The UK might suffer a debt downgrade if it goes ahead with another bout of tax cuts, a major ratings agency suggested.
In a note published yesterday, Fitch Ratings acknowledged that there had been relatively good news on the UK’s debt dynamics since its last rating in December.
However, with another ratings review scheduled for 22 March, Fitch said that “policy priorities will help clarify whether fiscal consolidation will be sufficient to reduce risks from high debt and borrowing costs.”.
It said it would examine whether the government’s announcements in the Budget help “reduce the uncertainty regarding fiscal consolidation prospects”.
The government is widely expected to announce another round of tax cuts in March in a bid to improve its election prospects. This would follow the round of tax cuts announced in the Autumn Statement.
To ensure that it meets its key fiscal rule of having debt falling within five years, the Conservatives have also pencilled in steep spending cuts in real terms for after the election.
Many economists have argued that these plans are implausible. “Implementing the fiscal consolidation projected after the election would entail real cuts in unprotected spending that could be politically challenging,” Fitch noted.
Credit rating agencies assess the creditworthiness of debt issuers. Fitch holds a ‘negative’ credit outlook on the UK, meaning it could be at risk of losing its AA- rating, which indicates a very low risk of default.
It estimated that the UK’s deficit rose to six per cent of GDP in 2023, up from 4.7 per cent of GDP in 2022. This was well above the 2.7 per cent median for other countries in the ‘AA’ category.
Fitch’s comments come shortly after the International Monetary Fund “advised the UK against further tax cuts,” arguing that preserving public services was more important.