Fitch cited a number of reasons for the downgrade including the tax cuts and a higher budget deficit.
The agency said: “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.”
It also highlighted high government debt, with the change in ‘fiscal trajectory’ pushing government debt to 109 per cent of GDP in 2024 compared to an estimated 101 per cent in 2022. The ratings agency said that this reflected “higher primary deficits and a weaker growth outlook”.
Two weeks of turmoil
Increased policy uncertainty following the Chancellor’s announcement was also a key factor in the move to decrease the UK’s credit rating.
Fitch said: “The large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact have, in Fitch’s view, negatively impacted financial markets’ confidence and the credibility of the policy framework, a key long-standing rating strength.”
Fitch also forecast that the economy would contract in 2023 despite the energy tariff support, announced by PM Liz Truss in September, and the proposed tax cuts.
The downgrade follows a fortnight of market misery, which saw the pound crash to a new low before recovering somewhat after intervention from the Bank of England and the government’s U-turn on the decision to scrap the 45p top rate of income tax.
The mortgage market has been hit particularly hard in the wake of the Chancellor’s Growth Plan, with residential mortgage products falling by a record 935 last week and rates on two year fixes breaching the six per cent mark for the first time since November 2008.
Only last week, the International Monetary Fund and Fitch’s fellow ratings agency Moody’s issued warnings over the government’s new monetary policy, with Moody’s saying that the unfunded tax cuts could lead to “structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure”.
