Home Europe UKโ€™s Stretched Finances Are โ€œElephant In The Roomโ€, Ratings Agencies Warn

UKโ€™s Stretched Finances Are โ€œElephant In The Roomโ€, Ratings Agencies Warn

The UKโ€™s stretched finances are โ€œthe elephant in the roomโ€ in this election given the UKโ€™s near 100% debt-to-GDP ratio, S&P Global says.

Despite the UKโ€™s stretched finances, all parties are promising to mend crumbling public services and invest in infrastructure without hiking key taxes. But the market panic when then-Prime Minister Liz Truss vowed to spend big in 2022 is a clear warning against being too radical.

โ€œWe are interested in the balance between revenue and expenditure adjustments, which will enable them (new government) to improve the underlying fiscal position,โ€ S&Pโ€™s Frank Gill explained.

With a relatively modest 1.3 percentage point of GDP primary budget deficit likely this year, the UK isnโ€™t as far away from a debt-stabilizing balance as G7 peers the U.S., France and Italy are at least.

โ€œBut still, there are questions about the composition of consolidation over the next few yearsโ€ฆ We try to take a view on the sustainability of the fiscal mix. Whatโ€™s really achievable and whatโ€™s not,โ€ said Gill.

2/ HOW MUCH ECONOMIC GROWTH?

Fitch raised its AA- UK rating outlook to โ€œstableโ€ in March, bringing it in line with Moodyโ€™s but still a grade lower than S&Pโ€™s AA score.

Its โ€œcautiousโ€ projections assumed โ€œa balancing of policy priorities against reducing risks to the sustainability of public financesโ€, noting how the UKโ€™s debt-to-GDP number was more than double the 48% of GDP median for โ€˜AAโ€™ bracket countries.

Stagnant economic growth, averaging just 1.6% a year over the last decade, will need to pick up considerably, however, to prevent the rating slipping back.

Achieving that wonโ€™t be easy given the headwinds of net migration as well as labour market participation and productivity growth issues.

3/ RULES BRITANNIA

There is also the question of whether changes will be made to the UKโ€™s self-imposed fiscal rules, which require public sector debt to fall as a share of GDP over a five-year period.

Some top Labour officials have suggested serious reforms are off the table for now, given markets are sensitive.


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The 2024-25 financial year is set to be the second-highest for government debt issuance on record at 278 billion pounds ($350 billion) though, and the interest bill on Britainโ€™s debt alone was a staggering 111 billion pounds last year, roughly 4.4% of GDP.

What is reassuring is that the 10-year gilt yield, which is a proxy for the UK governmentโ€™s borrowing costs, is down from last yearโ€™s highs at just over 4.1%.

4/ RESERVE CURRENCY STATUS

European-based rating firm, Scope, wants to know what will be done to ensure the pound retains is coveted global reserve currency status that helps the UK sell its debt, especially as alternatives such as Chinaโ€™s yuan rise up.

โ€œIs there anything that might be done to ensure sterlingโ€™s current strong place within the global monetary system?,โ€ said Scopeโ€™s Dennis Shen.

He added โ€œa stable government managing credible budgetary policiesโ€ was the best way do it, โ€œas might enhancing access to the (EU) Single Market,โ€ pointing to the hard job of healing post-Brexit scars.

5/ RENATIONALISATIONS?

Relentless amounts of raw sewage pouring into the UKโ€™s rivers and seas from privatised water companies have been a hot election topic with parties vowing to take action.

Investors are already bailing out of big water firms such as Thames, worried about being on the hook for the huge amounts of money that needs to be spent to solve that problem.

If they donโ€™t stump up though, the likes of Thames could go under in their current form, some in the industry have warned.

That would mean the government would need to step in and run them, which would be both complex and costly and add to the UKโ€™s debt.

โ€œIf that has to be funded, it would be reflected in their (UKโ€™s) fiscal assessment,โ€ Gill said. โ€œWill it be enough to change the UK rating? I would doubt it, because itโ€™s really a confluence of factors,โ€ which would lead to that.

With Reuters inputs