UK credit rating downgraded due to weakening economy and end of austerity

Economy and Policy September 25, 2017 by Tom Bailey

The UK saw its credit rating downgraded by Moody’s on Friday to Aa2, two places below the highest rating available.

According to the US credit rating agency, the UK Treasury is unlikely to meet the government’s deficit reduction target and will face ‘weaker public finances going forward.’

Moody’s said it expects the UK to collect less in tax receipts in the future, due to a slowdown in economic activity as the UK prepares to leave the European Union. It noted that quarterly growth has slowed in recent months, with private consumption slowing sharply and business investment weakening.

‘While future years may see some recovery, Moody's expects growth of just 1 per cent in 2018, following 1.5 per cent this year and 2.25 per cent on average in recent years,’ the agency noted.

At the same time, Moody’s expects to see public spending rise. After seven years of public spending cuts, the agency noted, there is mounting ‘political and social pressures to raise spending’.

The government has ‘yielded to pressure and raised spending in several areas,’ Moody’s said. In particular, the agency singled out the lifting of the public sector pay gap and abandonment of a revision to the so-called ‘triple lock’ on state-pension.

Over the past seven years the UK has reduced its public spending deficit from 10 per cent of GDP to 2.3 per cent in the 2016/2017 financial year. According to the government, that number will be below 1 per cent by the financial year of 2021/22.

However, Moody’s predicts that the budget deficit will remain at between 3-3.5 per cent over the next few years.

-The tax break that two million people are not claiming

The downgrade came soon after the prime minister delivered her speech in Florence, outlining UK’s position on Brexit with the aim of moving negotiations forward.

The Treasury quickly hit back at Moody’s for the downgrade, arguing that ‘the assessments made about Brexit in this report [from Moody’s] are outdated.’

‘The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership,’ the Treasury argued.

‘We have made substantial progress in reducing the deficit while finding extra money for the NHS and social care at the same time.’ a Treasury spokesperson said.

This downgrade is not the first the UK has faced from Moody’s over the past 16 months. Following the Brexit referendum in June 2016, the agency downgraded the UK to Aa1, the second highest score it offers.

Other credit rating agencies also downgraded the UK in 2016, with Fitch cutting the UK’s score from AA+ to AA and S&P cutting from AAA to AA, a two-notch downgrade.

The downgrade itself is unlikely to have any major impact on UK investors, although it highlights the weakening position of the UK economy. 

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