LONDON: The UK’s credit rating was downgraded by Moody’s late on Friday night, prompting a dispute with the government over the health of Britain’s public finances. Reducing the credit rating a notch to Aa2, or two rungs below the triple A rating Britain had enjoyed for 35 years until 2013, Moody’s said the public finances were more stressed than the Treasury believed and the challenges of Brexit would increase risks to the exchequer and complicate policymaking. The timing of the rating agency’s decision could not be more wounding for Theresa May, who hoped her speech in Florence, seeking to kick life back into the Brexit negotiations, would ease her political difficulties. Within an hour, the Treasury hit back, accusing Moody’s of being out of date. “The assessments made about Brexit in this report are outdated.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 said in a statement. “We have made substantial progress in reducing the deficit while finding extra money for the NHS and social care at the same time. We are not complacent about the challenges ahead but we are optimistic about our bright future,” a Treasury spokesperson added. In the final minutes of trading on Friday the downgrade pushed sterling below $1.35.
The downgrade is not expected to have a serious effect on the cost of Britain’s public sector net debt burden of £1.8tn, but will focus attention on the headroom Philip Hammond, the chancellor, has in his public finances plans to mitigate any economic damage from Brexit. In the Budget in March, Mr Hammond, had £26bn of headroom against his fiscal target of reducing public borrowing to 2 per cent of national income by 2020-21. Moody’s is warning that lower growth and political difficulties will whittle this figure down ahead of the Budget on November 22. The rating agency said: “The outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise.” A second reason it gave for the downgrade was that Britain’s economic performance was likely to be hit by Brexit. Political infighting within government has added to pressures, Moody’s added, saying the public finances were likely to be undermined by “the complexity of Brexit negotiations and associated political dynamics”. Moody’s said the outlook on its Aa2 rating was now stable. Kathrin Muehlbronner, Moody’s analyst, said there were “increasingly apparent challenges” to policymaking following the Brexit referendum and subsequent snap election that vastly eroded Mrs May’s majority in parliament. She told the Financial Times on Friday that the weakness in the pound, which has fallen 9 per cent against the US dollar and 14 per cent against the euro since the Brexit vote last year, had pushed inflation across Britain higher. “Households are seeing disposable income decline so private consumption has slowed down significantly in the first few quarters of this year,” Ms Muehlbronner said. She added that private sector investment had also been “subdued”, blaming increased inflation and political uncertainty.
Recent out-turns for taxes and public spending have been better than expected, but the medium term outlook was poor, Moody’s said in its ratings note, resulting from slower economic growth and the political difficulties of continuing austerity for longer than seven years. Noting the political difficulties facing Mr Hammond as he prepares for his November Budget, the rating agency said it had taken into consideration the £1bn offered to the Democratic Unionist Party for support after June’s election, the abandonment of the review of the pensions triple lock and increasing strains on healthcare and the public sector wage bill. “Moody’s expects the budget deficit to remain at 3 to 3.5 per cent of GDP in coming years against the government’s plan of a gradual reduction to below 1 per cent in 2021-22,” its note said.