Ratings agency Moody’s has downgraded Britain’s credit rating, saying the government’s plans to bring down its heavy debt load had been knocked off course and Brexit would weigh on the economy.
A few hours after Prime Minister Theresa May set out plans on Friday for new ties with the European Union, Moody’s cut the rating by a further notch to Aa2, 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 per cent of economic output in 2010, shortly after the global financial crisis hammered the country, to 2.3 per cent.
But Moody’s – which stripped Britain of its top-notch AAA rating in 2013 – said the outlook for public finances had weakened significantly as May’s government softened the austerity drive of former prime minister David Cameron and his finance minister George Osborne.
The government hit back, saying Moody’s assessment of the Brexit hit to the economy was “outdated” and that May had set out an “ambitious vision for the UK’s future relationship with the EU” in her speech on Friday.
But a Moody’s official said the speech made no difference to the agency’s gloomy long-term view for Britain’s economy.
“Having looked at Theresa May’s speech, I don’t think there is anything in there which would in any way make us change our assessment,” Alastair Wilson, managing director of global sovereign risk at Moody’s, told BBC radio on Saturday.
“Over the next few years, we have a lot less confidence that the UK’s government is going to be able to fulfil its plans to bring the debt load back down, and this is an extremely high debt load that the UK has, or to be able to achieve some form of agreement with the EU which retains a substantial share of the rights that membership of the EU grants,” he said.
Moody’s verdict will be grim reading for May and her finance minister Philip Hammond, who is under pressure to spend more in his budget plan, due in November.
After seven years of austerity, a recent relaxation of a tight public sector pay cap for police and prison workers was likely to be broadened, Moody’s said.
“Overall, Moody’s expects spending to be significantly higher than under the government’s current budgetary plans,” Moody’s said.
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.
The sheer workload of Brexit in the coming years meant the government would struggle to fix Britain’s weak productivity growth, the Achilles heel of the economy, it said.
Britain’s government said Moody’s move brought it into line with the other major credit ratings agencies, Fitch and Standard & Poor’s.