The Treasury has hit back at warnings by the credit ratings agency Moody’s that the likelihood of a hard Brexit and a squeeze on the public finances would damage the UK economy’s long-term health.
Announcing its decision just hours after Theresa May gave her speech in Florence on the government’s Brexit strategy, the ratings agency said it had cut the UK’s credit rating to Aa2 from Aa1 partly in response to the looming prospect of the UK’s access to the European Union’s single market and customs union being reduced.
Moody’s, which was the first major credit ratings agency to strip Britain of its top-notch AAA rating in 2016, said plans to ease austerity measures and lift the public sector pay cap would put pressure on the public finances while slower growth over the next four to five years was likely to reduce tax receipts.
Britain has cut its budget deficit from about 10% of economic output in 2010 to 2.3% in the 2016/17 financial year, but the annual deficit is expected to rise this year following a period of declining household incomes.
“Moody’s expects the budget deficit to remain at 3% to 3.5% of GDP in coming years against the government’s plan of a gradual reduction to below 1% in 2021/22,” its note said.
“Fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union, and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics,” Moody’s said.
The Office for Budget Responsibility said in March that the Treasury would have about £26bn of headroom in the public finances over the next five years, offering the prospect of tax cuts or spending increases in the autumn budget on 22 November.
Recent figures for the public finances have shown them to be recovering with tax receipts outstripping higher spending.
But Moody’s said this was likely to prove shortlived: “Moody’s expects the budget deficit to remain at 3 to 3.5% of GDP in coming years against the government’s plan of a gradual reduction to below 1% in 2021/22.”
The Treasury accused the ratings agency of being out of date following May’s speech, which it said provided more clarity about the UK’s relationship with the EU.
“The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership,” the Treasury said.
“We have made substantial progress in reducing the deficit while finding extra money for the NHS and social care at the same time. We are not complacent about the challenges ahead, but we are optimistic about our bright future,” a Treasury spokesperson added.
Moody’s revised up its outlook on the country to stable from negative, meaning a further downgrade is not imminent.
The shadow treasury chief secretary, Peter Dowd, said the downgrading was a “hammer blow” to the government’s economic credibility.
“For the second time under the Tories the UK’s credit rating has been downgraded, and on this occasion citing their lack of faith in the chancellor to meet his own spending targets as a result of unfunded spending commitments such as the deal with the DUP,” he said.
The Liberal Democrat leader, Sir Vince Cable, said it was no coincidence the downgrading followed May’s address in Florence.
“Despite Theresa May’s conciliatory tone we are no closer to knowing what our future relationship with the EU will be once any transitional deal expires,” he said.
“The warning that Moody’s have issued by downgrading the credit rating is that the economy will be weaker once the transitional deal comes to an end. All May has done is simply delay the economic pain caused by an extreme Brexit.”
This article was written by Phillip Inman, for theguardian.com on Saturday 23rd September 2017 14.03 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010