A top US credit rating agency has downgraded its outlook on Britain’s sovereign debt from “stable” to “negative” amid the fallout from Prime Minister Liz Truss’ mini-budget fiasco.
Fitch announced its decision on Wednesday, warning that Chancellor Kwasi Kwarteng’s “unfunded fiscal package” could lead to a “significant increase in fiscal deficits over the medium term.”
This followed a similar move by rival Standard & Poor’s (S&P’s) a few days ago, but Fitch maintained its ‘AA-‘ UK credit rating, one notch below S&P’s, citing “weakened political capital ” of the government.
It comes after Mr Kwarteng’s mini-budget announcement on September 23, promising £45 billion in tax cuts, spooked markets and sent the pound plummeting against the dollar.
The Bank of England (BoE) was forced to step in and buy up to £65bn of government debt in a bid to shore up confidence and prevent the collapse of pension funds.
After a backlash from voters and MPs, Ms Truss and Mr Kwarteng were forced to make a humiliating U-turn by abandoning plans to scrap the top rate of 45p. However, Fitch said this was not enough to allay concerns.
“The large and unfunded fiscal package announced as part of the new government’s growth plan could lead to a significant increase in fiscal deficits over the medium term,” Fitch said in a statement.
“We believe that the chancellor’s statements hinting at the possibility of further tax cuts and the likely change to the fiscal rules legislated in January reduce the predictability of fiscal policy.”
It added: “Although the government reversed the removal of the 45p top rate tax… the government’s weakened political capital could further erode confidence and support for the government’s fiscal strategy.”
On Wednesday, Fitch cut the outlook for its UK sovereign debt rating from stable to negative after new Prime Minister Liz Truss announced a program of debt-fuelled tax cuts
Interest rates on UK debt in June this year were more than double compared to the same month last year
Debt interest costs in June topped all previous monthly figures since records began in 1997
Mrs Truss on Wednesday pledged to steer Britain towards growth as she closed the Conservative Party’s stormy annual conference at the ICC in Birmingham.
Just a month after succeeding Boris Johnson, Mrs Truss has alienated many voters, the latest polls suggest, and in turn the financial markets and many of her own MPs.
But she argued in a speech on Wednesday that the status quo was not an option, despite the failure to implement her fiscal plan, resulting in a humiliating reversal of a promise to cut income tax for the highest earners.
The failure to deliver on her economic plan failed to calm jittery markets, however, and the pound fell 2.01 percent against the dollar to $1.1241 after her address.
“She may have hoped that her triple-digit growth pledge would calm markets further, but with nothing new to bring to the table, her words have so far not had the desired effect,” said Susanna Streeter, analyst at Hargreaves Landsdown .
Ms Truss’s disastrous start to her prime ministership, with a 10-day hiatus following the death of Queen Elizabeth II, has already left her scrambling to keep her job.
Former minister Grant Shapps, who backed Ms Truss’s leadership rival Rishi Sunak, said she could face a vote of no confidence from MPs if the keynote speech failed to start to revive the party’s dismal position in the opinion polls .
It came after some polls had given Sir Keir Starmer’s Labor Party a lead of up to 38 points.
“At the end of the day, I don’t think MPs, the Conservatives, if they see the election going like this, they’re going to sit idly by,” he told Times Radio.
“A way will be found to make that change.”
Wednesday’s make-or-break speech was not without hiccups, with Greenpeace protesters holding up a banner reading “who voted for this?” before being ejected.
Ms Truss’ critics, including allies of the ousted Boris Johnson, accused her of lacking a national mandate for her unpopular reforms after winning the Tory leadership in a vote by party members.
But on Wednesday she insisted Britain must “do things differently” with no time for “more diversion and delay”.
“Whenever there is change, there is disruption. Not everyone will be in favor. But everyone will benefit from the outcome – a growing economy and a better future,” she said.
It remains to be seen whether the speech will have the desired effect.
Ms Truss’s interviews in the run-up to Wednesday have focused relentlessly on the U-turn she and Chancellor Kwarteng have been forced to make on a key element of their major reform.
Cabinet rifts have surfaced further in Birmingham amid indications that despite the impact of the crisis on the poor, the pair will cut welfare benefits.
Ms Truss denied she had lost control of her cabinet after showing solidarity with the embattled Mr Kwarteng during a visit to a construction site in Birmingham on Tuesday.
But there was little team spirit on display from Home Secretary Suella Braverman, who accused party critics of wanting to stage a “coup” against Mrs Truss.
Dissident Tartar Michael Gove was one of Braverman’s targets. But he continued to criticize Ms Truss, pointing out that all Conservative MPs had been elected on Mr Johnson’s 2019 manifesto.
“We have to keep our faith in what Boris wanted,” Mr Gove said, underscoring the fact that Mrs Truss has yet to face the British electorate.
But asked by reporters if she would survive beyond the end of the year, the former minister said: “Yes.”
Foreign Secretary James Cleverley also distanced himself from Ms Braverman’s comments, although he urged his colleagues to voice their disagreements in cabinet.
Opinion polls showed the main opposition Labor Party over 50 per cent as the Tories collapsed, fraying nerves in Birmingham during the party’s four days of conference.
“The polls really go up and down,” Mr Kwarteng said on Tuesday, stressing that two years until the next election was “an eternity in politics”.
It comes after IMF chief Kristalina Georgieva said on Tuesday that the Bank of England (BoE) was right to act quickly in response to Britain’s budget proposal late last month – which consisted of £45bn of tax cuts.
She said it was important to avoid a contradiction between the policies of the government and the central bank.
“We cannot make fiscal policy work against monetary policy by providing untargeted policy support. The most vulnerable segments of society must be reached,” she said in an interview with Al Arabiya.
“In the UK we saw this contradiction between monetary and fiscal policy,” she said, “but the Bank of England acted very quickly in an appropriate way.”
And she noted that authorities are “taking steps to ensure that there is consistency (and) there are now changes to how the package will be prosecuted.”