Ratings agencies have five queries for the incoming UK administration.
LONDON, July 4 (Reuters) - The companies that slashed Britain's credit score after Brexit and again when Liz Truss shook markets in 2022 say they have a list of questions that need answers as the country prepares to vote on Thursday for its first change of government in 14 years.
1. SLIP OR STABILISE?
With the UK's nearly 100% debt-to-GDP ratio, the country's stretched finances are "the elephant in the room" in this election, according to S&P Global. All political parties pledge to repair deteriorating public services and finance infrastructure without raising significant taxes. But there's a clear warning not to become too extreme after then-prime minister Liz Truss pledged to spend heavily in 2022, which caused the market to worry.
"We are interested in the balance between revenue and expenditure adjustments, which will enable them (new government) to improve the underlying fiscal position," said Frank Gill of S&P. At least in comparison to its G7 rivals, the United States, France, and Italy, the United Kingdom is not far from a debt-stabilizing balance, with a relatively moderate primary budget deficit of 1.3 percentage points of GDP expected this year. "However, there remain uncertainties on the makeup of consolidation in the upcoming years... We attempt to adopt a stance about the fiscal mix's sustainability. What's actually attainable and what's not," Gill remarked.
2/ HOW MUCH GROWTH THEECONOMIC?
Matching Moody's but still one notch below S&P's AA rating, Fitch updated its AA-UK rating outlook to "stable" in March. The UK's debt-to-GDP ratio was more than twice as high as the 48% of GDP median for countries in the "AA" band, according to its "cautious" assessments, which also indicated that there would be "a balancing of policy priorities against increase risks to the sustainability of public finances." Still, considering the weak economic growth—which has averaged only 1.6% yearly over the last ten years—a major acceleration is needed to prevent the grade from falling. Advertisement · Press to continue Reaching that goal won't be easy, given the obstacles presented by labour market participation, net migration, and productivity growth.
3/ BRITANNIA RULES
Another question is whether the UK would change its self-imposed fiscal constraints, which require public sector debt to decline as a percentage of GDP over a five-year period. Some senior Labour officials have said that big adjustments are not feasible at this time because of how sensitive the markets are. Despite the fact that the 278 billion pounds ($350 billion) in government debt issued in 2024–2025 is predicted to be the second-highest amount ever, the interest paid on Britain's debt alone was an astounding 111 billion pounds last year, or around 4.4% of GDP. Relative to last year's highs, the 10-year gilt yield has decreased, to less than 4.1%, which is a reassuring indication of the UK government's borrowing costs.
4/ RESERVE STATUS OF CURRENCY
The European rating agency Scope is interested in learning how the UK will proceed to maintain the pound's coveted role as the world's reserve currency, which is crucial for selling its debt, particularly in light of the growing strength of alternatives like China's yuan. "Is there anything that might be done to ensure sterling’s current strong place within the global monetary system?," Dennis Shen of Scope stated. Pointing to the difficult task of healing post-Brexit scars, he continued, "a stable government managing credible budgetary policies" was the best way to achieve so, "as might enhancing access to the (EU) Single Market."
5/ Re-imaginings?
The continuous flow of raw sewage from private water companies into the UK's rivers and oceans has been a key election-related issue, and parties have promised to take action in response. Large water corporations like Thames are already losing investors due to their concern of being held financially liable for the vast sums of money needed to remedy the problem. Meanwhile, some in the industry have cautioned that businesses such as Thames may fail in their current shape if they don't put in the money. This would suggest that they would need to be taken over and managed by the government, which would be costly, difficult, and add to the UK's debt.
This would suggest that they would need to be taken over and managed by the government, which would be costly, difficult, and add to the UK's debt. "If that has to be funded, it would be reflected in their (UK's) fiscal assessment," Gill said. "Will changing the rating in the UK be enough? I would highly doubt it, as there are actually several factors that combine to produce that.
