ANKARA
Global rating agency Moody’s on Wednesday released a cautionary statement on the UK government’s newly unveiled mini-budget, saying that the large and unfunded tax cuts in it could lead to higher deficits amid rising borrowing costs and a weaker growth outlook.
“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 in a statement.
It underlined that while an “energy price cap” introduced by the government earlier this month would “directly reduce inflationary pressures in the near term,” real disposable incomes could decline this year due to inflation, remaining “elevated and above the central bank’s target of 2% until 2025.”
Moody’s forecasts inflation to peak at close to 11% in the coming months.
British Chancellor Kwasi Kwarteng on Friday unveiled the mini-budget measures, comprised of a debt-financed package of £45 billion ($49 billion) in tax cuts — the biggest round in 50 years.
Since then, pressure has mounted on the new finance minister as the policy has caused the British pound to tumble to a record low value.
Moody’s also said the large unfunded fiscal stimulus in the mini-budget and inflation would lead the Bank of England to opt for more aggressive monetary policy tightening, “weighing on growth in the medium term.”
The agency revised its real GDP growth forecast for the UK to 3.3% for 2022 from 3%, while lowering its projections for 2023 to 0.3% from the previous 0.9%.
“We do not expect growth to return to its potential until 2026,” it underlined.
Earlier, the International Monetary Fund (IMF) also warned the UK government that the nature of the latest fiscal measures would “likely increase inequality.”
