The UK’s high debt and “constrained” fiscal outlook remains a weak spot for its sovereign debt status, one of the world’s leading ratings agencies has said, warning of the uphill challenge facing the new Labour government.
S&P Global said the UK’s debt pile was on course to peak at 100 per cent of GDP next year and only fall “slowly” in subsequent years. The agency said the fiscal picture meant Labour faced a series of “difficult policy trade-offs” as it has promised to repair the public finances, grow the economy and improve public services.
“The UK’s fiscal position remains constrained and a weakness for our AA sovereign credit ratings,” S&P said on Tuesday. “The general government deficit was 6 per cent of GDP in 2023 while gross debt was slightly above 100 per cent of GDP, the highest in a decade.
“This limits the government’s ability to fund its policy initiatives through increased net borrowing, especially given the previous disruptive market response to an unfunded fiscal loosening package announced by former prime minister Liz Truss.”
S&P removed its negative outlook on the UK’s sovereign debt in April last year, months after a warning about the stability of the public finances in the aftermath of the September 2022 mini-budget.
Advertisement
The agency cut its AAA rating on the UK after the Brexit vote in 2016 and only retains the top status for a handful of countries, including Germany, the Netherlands, Canada and Australia.
The latest warning over Britain’s fiscal outlook suggests that an upgrading of UK debt is unlikely under the new government.
S&P said that despite Labour’s promises to hit a self-imposed fiscal rule to bring down the debt pile over a rolling five-year period, “increasing revenues or controlling spending growth will likely prove challenging”.
It added: “Tax burdens are already at a postwar high while pressure to increase public spending is likely to persist, given how strained some key public services are, as well as the need to fund defence and meet gradually rising costs related to an aging population.”
S&P said that the UK’s budget deficit was projected to narrow from the current 4.5 per cent of GDP this year to 3.2 per cent by 2027.
Advertisement
Rachel Reeves, the chancellor, is preparing to deliver her first budget in the autumn and has asked Treasury officials to draw up an assessment of the state of the economy and public finances to be published in the coming weeks.
The chancellor has already announced a new housebuilding target of 1.5 million by the end of the parliament and a reversal on the ban on onshore wind.
The UK’s election result, which was widely expected based on polling, has not triggered a rally in government bonds, with yields on 10-year debt trading in a stable range between 4.1 and 4.2 per cent in the last week.
“Absent an acceleration in economic growth, stabilising public debt levels will likely be a challenge,” S&P said.
