Fitch downgrades UK’s outlook to negative

Ratings agency cites ‘lack of independent evaluation’ of mini budget among reasons

UK Chancellor of the Exchequer Kwasi Kwarteng
Copyright: HM Treasury/Flickr

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Fitch Ratings has downgraded the UK’s Long-Term Foreign Currency Issuer Default Rating from ‘Stable’ to ‘Negative’ following chancellor Kwasi Kwarteng’s (pictured) mini budget.

According to Fitch, the “large and unfunded” fiscal package could lead to a significant increase in fiscal deficits over the medium term, while the credit rating agency also cited political uncertainty, weaker growth prospects and increased borrowing as reasons for the downgrade.

Despite the lowered outlook, the UK has maintained its ‘AA-‘ investment rating.

In the wake of Kwarteng’s mini budget, announced on 23 September, sterling tumbled to a record low against the dollar, while the Bank of England took emergency action by purchasing long-dated UK government bonds, citing a “material risk to UK financial stability”.

The credit ratings agency is the second to act this week following the mini budget, after S&P put the UK’s credit rating on a downgrade warning on Monday.

“The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact, and the inconsistency between fiscal and monetary policy stance given strong inflationary pressures have, in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength,” said Fitch.

Kwarteng’s decision to U-turn on removing the 45% top rate of income tax did not impact the ratings. “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 added.

“We forecast the economy to contract in 2023 despite the energy tariff support and the proposed tax cuts. In addition to the energy crisis and weaker external demand, the likely tighter domestic financing conditions will lead to a contraction of 1.0% in 2023 before growth recovers to 1.8% in 2024.”

Commenting on the ratings report, Parmenion investment director, Jasper Thornton-Boelman, said: “After a universally criticised mini-budget and an embarrassing tax cut U-turn, Kwasi Kwarteng must feel like the rating agencies are kicking him whilst he’s down. This latest downgrade doesn’t feel overly surprising given the similar move by Standard and Poor’s, and obviously the crux of the issue – the lack of any disclosure around how they intend to fund their plans.”

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