Global ratings agency Moody’s has warned that the UK’s “unfunded” tax cuts could lead to larger budget deficits and higher interest rates.
In a statement on Tuesday after the rare intervention from the IMF, the agency questioned the “credibility of the government’s fiscal strategy” in a direct blow to Liz Truss and Kwasi Kwarteng.
It was also the biggest threat yet that the rating agency could downgrade the UK’s credit rating.
Moody’s rates governments on their creditworthiness, or their ability to repay their debts.
Its rating for the UK is currently set at Aa3 with stable outlook, but if it was downgraded this could significantly increase the level of interest the UK will have to pay on its debt - making the cost of borrowing much higher.
The agency warned on Tuesday evening that Mr Kwarteng’s mini-Budget risked “permanently weakening the UK’s debt affordability”.
It said it was not expecting economic growth to return to its potential until 2026. It has also lifted its forecast for UK economic growth to 3.3 per cent for 2022, from 3 per cent.
However it has cut its 2023 forecast to 0.3 per cent, from 0.9 per cent.
“A sustained confidence shock arising from market concerns over the credibility of the government’s fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK’s debt affordability,” Moody’s said.
“Large unfunded tax cuts will lead to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure stemming from the pandemic and a decade of austerity,” the statement said.
The government’s plans would only add to soaring inflation and could prompt further action from the Bank of England, the agency said.
They added that Ms Truss and Mr Kwarteng’s plans were “credit negative”.
It comes after the Bank of England’s chief economist said that “recent events” would require a “significant monetary policy response”.
In a rare statement on Monday, governor Andrew Bailey said that the Monetary Policy Committee “will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent sustainably”.
The IMF sounded the alarm on Tuesday evening, warning that the government’s plans will “likely increase inequality”. It urged Mr Kwarteng to “re-evaluate” his proposals in his fiscal statement on 23 November.
