LONDON—S&P Global Ratings lowered its outlook on U.K. sovereign debt on Friday, citing risks to the country’s economy stemming from the government’s recently announced tax-cutting plans.
The ratings company revised its outlook to negative from stable, saying the “measures could weaken the U.K.’s fiscal position” because they might raise government borrowing costs and make it harder for the country to tame inflation. At the same time, S&P affirmed the U.K.’s double-A credit rating.
The government of new Prime Minister
on Sep. 23 unveiled the country’s largest tax cuts since the early 1970s. The announcement immediately triggered a meltdown in markets, sending the pound to a new low against the dollar and government bond yields soaring. The Bank of England had to intervene in the bond market Wednesday to stanch a liquidity crisis hitting the country’s pension funds.
The dour assessment from the ratings company was the latest hit to the U.K.’s once sterling reputation for financial management. Officials at the International Monetary Fund criticized the U.K. last week.
A negative outlook is often, but not always, a precursor to an actual downgrade. Because the U.K. remains several levels away from a speculative grade, or junk, credit rating, it is unlikely a downgrade would have a substantial effect on investors. Some large insurance and pension firms are restricted from owning debt that is rated as junk.
S&P’s rival Moody’s last week said the tax plan was “credit negative” but didn’t officially lower its outlook or change its rating.
Bond markets have moved sharply to take into account the U.K.’s new spending plans. Borrowing costs for the U.K. government remain substantially higher than before the tax plan was unveiled, even though they fell slightly on Friday.
The ratings company said it expects government debt to continue rising for the next two to three years, reversing its previous expectation of its falling from 2023.
The U.K. economy is forecast to record zero growth next year, the third-lowest rate in the Group of 20 leading economies after Russia and Germany, according to the Organization for Economic Co-operation and Development.
S&P said it might have to make further updates to its forecast if the country’s economic growth is weaker than expected or if borrowing costs swell owing to market forces and actions from the central bank.
Write to Julie Steinberg at [email protected]
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