Moody’s downgrades UK’s credit rating

Ratings agency Moody’s downgraded Britain’s credit rating by a further notch on Friday, saying the government’s plans to fix the public finances had been knocked off course and Brexit would weigh on the economy.    

A few hours after prime minister Theresa May set out plans for a new relationship with the European Union, Moody’s cut the rating to Aa2 from Aa1, underscoring the economic risks that leaving the bloc poses for the world’s fifth-biggest economy.

Britain has worked down its budget deficit from about 10 percent of economic output in 2010, shortly after the global financial crisis hammered the country, to 2.3 percent in the most recent financial year which ended in March.

But Moody’s said the outlook for public finances had weakened significantly as May’s government increasingly put into question the austerity push pursued by former prime minister David Cameron and his finance minister George Osborne.

“Outdated” assessment

The government responded by saying Moody’s assessment of the Brexit hit to the economy was “outdated” and that May had set out an “ambitious vision for the UK’s future relationship with the EU” in a speech earlier on Friday.

The Moody’s downgrade was made after a meeting with the government on September 19 and did not reflect May’s speech on Friday, the government said.

Nonetheless, Moody’s verdict on Britain’s public finances will make for grim reading for May and her finance minister Philip Hammond.

After seven years of austerity, the government was coming under pressure to ease its squeeze on public finances and a recent relaxation of a tight public sector pay cap for police and prison workers was likely to be broadened, Moody’s said.

On the tax side, it noted how the government abandoned a controversial plan to raise national insurance contributions for self-employed workers and was reliant on “highly uncertain revenue gains from tackling tax avoidance to fund tax cuts”.

As a result, the budget deficit was likely to remain at around 3-3.5 percent of GDP in the coming years, higher than the government’s plans to cut it below 1 percent of GDP by 2021/22.

Brexit hit 

At the same time, budget pressures would rise as Britain’s economy slowed due to Brexit, with growth of just 1 percent likely next year, down from 1.8 percent in 2017 and not recovering to its historic trend rate over the coming years.

Moody’s said it was no longer confident that Britain would secure a replacement free trade agreement with the EU which substantially mitigated the Brexit hit.

“While the government seeks a ‘deep and comprehensive free trade agreement’ with the EU, even such a best-case scenario would not award the same access to the EU single market that the UK currently enjoys,” it said.