One of the leading rating agencies in the world has warned that the UK’s high level of debt and its “constrained” fiscal future remain a weakness for the country’s sovereign debt status.
S&P Global stated that the UK’s debt was on track to reach 100 percent of GDP by next year, and will only “slowly decline” in future years. According to the agency, the fiscal situation meant that Labour would have to make “difficult trade-offs”, as it had promised to fix the public finances and grow the economy while improving public services.
S&P stated on Tuesday that “the UK’s fiscal situation remains constrained, and a weakness in our AA sovereign ratings.” The general government deficit in 2023 was 6% of GDP while gross debt was just above 100% of GDP. This was the highest level in a decade.
This limits the government’s capacity to fund its policies through increased net borrowing. This is especially true given the previous market reaction to the unfunded fiscal easing package announced by the former Prime Minister Liz Truss.
S&P removed the negative outlook from the UK sovereign debt in April of last year. This was months after the warnings about the stability in the public finances following the mini-budget of September 2022.
After the Brexit vote of 2016, the agency reduced its AAA rating for the UK and now only maintains top ratings for a few countries including Germany, The Netherlands, Canada, and Australia.
According to the latest warning on Britain’s fiscal outlook, an upgrade of UK debt under the new government is unlikely.
S&P stated that, despite Labour’s promise to adhere to a self-imposed rule of fiscal discipline to reduce the debt over a rolling 5-year period, “increasing revenue or controlling spending growth is likely to prove difficult”.
The report added that “tax burdens have already reached a high level since the end of World War II, and pressure to increase spending on public services will likely persist, due to how stretched some public services are as well as a need to fund defense as well as meet rising costs associated with an ageing population.”
S&P stated that the UK budget deficit is projected to shrink from 4.5 percent of GDP to 3.2 percent by 2027.
Rachel Reeves is getting ready to present her first budget this autumn. She has asked Treasury officials for an assessment of state of economy and public finance to be published within the next few weeks.
The chancellor announced that he would set a new target for housebuilding by the end the Parliament, of 1.5 million houses. He also reversed the ban on offshore wind.
The UK election result was widely anticipated based on polling. However, it has not led to a rally of government bonds. In the last week, yields for 10-year debt have been trading in a range between 4,1 and 4,2 per cent.
S&P stated that “Stabilising public debt levels without an acceleration in the economic growth will be a challenge.”
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