Global rating agency Moody’s has warned that “unreasonable” tax cuts in the UK could lead to a widening budget deficit and higher interest rates.
In a statement Tuesday following a rare intervention by the IMF, the agency questioned the “credibility of the government’s fiscal strategy” in a direct blow to Liz Truss and Kwasi Kwarteng.
Also the biggest threat was that the rating agency could downgrade the UK’s credit rating.
Moody’s evaluates governments by their creditworthiness, or their ability to repay their debts.
Its rating for the UK is currently set at Aa3 with a stable outlook, but if it is downgraded it could significantly increase the level of interest the UK has to pay on its debt, making borrowing costs much higher.
The agency warned on Tuesday evening that Mr Kwarteng’s mini-budget risked “permanently weakening Britain’s debt affordability”.
He said he does not expect economic growth to return to its potential before 2026. He also raised his forecast for UK economic growth to 3.3 percent for 2022 from 3 percent.
However, he lowered his forecast for 2023 from 0.9% to 0.3%.
“A prolonged shock to confidence driven by market concerns about the credibility of the government’s fiscal strategy, which has led to structurally higher financing costs, could further weaken UK debt affordability more permanently,” Moody’s said.
“Large unfunded tax cuts will lead to structurally higher deficits amid rising borrowing costs, weaker growth prospects and acute pressure on public spending caused by the pandemic and a decade of austerity,” the statement said.
The agency said the government’s plans would only exacerbate soaring inflation and could prompt the Bank of England to take further action.
They added that Ms. Truss and Mr. Kwarteng’s plans were “credit negative.”
This comes after the Bank of England’s chief economist said “recent developments” will require a “significant monetary policy response”.
In a rare statement on Monday, Gov. Andrew Bailey said the Monetary Policy Committee “would not hesitate to change interest rates as much as necessary to bring inflation back to 2 percent on a sustained basis.”
The IMF sounded the alarm Tuesday evening, warning that the government’s plans are “likely to increase inequality.” He urged Mr. Kwarteng to “re-evaluate” his proposals in his November 23 financial statement.
Credit: www.independent.co.uk /