In the wake of Prime Minister Liz Truss’s mini-budget disaster, a top US credit rating agency has reduced its outlook on British government debt to’stable’ from ‘negative.
Fitch, a financial firm, announced Wednesday its decision warning that Kwasi Kwarteng’s unfunded fiscal package could cause a significant increase in fiscal deficits in the medium-term.
It followed a similar move by rival Standard & Poor’s (S&P’s) a few days ago, however Fitch maintained its ‘AA-‘ credit rating for the UK, which is one level lower than S&P’s, citing the government’s ‘weakened political capital.’
It comes after Mr Kwarteng’s mini-budget announcement on September 23 promised £45billion in tax cuts, which spooked markets and sent the pound plummeting against the dollar.
The Bank of England (BoE) was forced to step in and purchase up to £65billion in government debt in a bid to shore up confidence and prevent pension funds collapsing.
After backlash by voters and MPs Ms Truss was forced to make a humiliating U turn and abandon plans for abolishing the top 45p tax rate. Fitch stated however that it was insufficient to calm concerns.
Fitch released a statement saying that the unfunded and large fiscal package in government’s growth program could result in an increase in fiscal debts over the medium term.
“We believe that the statements of the Chancellor suggesting additional tax cuts, and possibly modifying fiscal rules legislated January decrease the predictability fiscal policy.
The government also stated that even though the tax was repealed by the government, the weakening of political capital may further damage the legitimacy and support of the fiscal strategy of the government.
Fitch reduced Wednesday’s outlook for British debt credit ratings from stable-to-negative after Liz Truss (new Prime Minister) announced tax cuts that would fuel debt.
In June, the interest rate on UK debt was over twice that of last year.
Since records started in 1997, the debt interest rates in June were greater than any previous month figures.
As she close the tumultuous Conservative Party annual conference in Birmingham, Ms Truss pledged to lead Britain toward growth.
Boris Johnson’s successor, Ms. Truss, just a month ago, has disenfranchised many voters.
In her Wednesday speech, she said that the status-quo is not possible despite her disastrous fiscal plan which resulted in a shameful U-turn regarding a promise to lower income taxes for high earners.
The inability to develop her economic plan did not calm the markets. However, the pound fell 2.01 percent against $1.1241 following her address.
Susannah Streeter, analyst at Hargreaves Landsdown said, “She might have hoped her triple promise to growth would have calmed the markets further, but with nothing new on the table, their words have not had any effect so far.”
She has been fighting for her job since Ms Truss’s disastrous start to her premiership.
Grant Shapps who used to be a minister and supported Rishi Sunak as Ms Truss’s rival in leadership, stated that she might face a vote of no confidence by MPs should the speech fail to begin reviving the party’s grim standing in polls.
This was after Sir Keir Sterner’s Labour Party led by up to 38 percentage points in some polls.
“In the end I don’t believe that members of Parliament, Conservatives, should see the polls continuing as they are,” he said to Times Radio.
“A way could be found to effect that change.”
On Wednesday, the speech was not without its problems. Greenpeace protesters raised a banner asking for votes. Before they were expelled.
Ms. Truss was criticized by allies and supporters of Boris Johnson after her victory as Tory leader following a vote from party members.
She insisted that Britain must ‘do everything differently’ on Wednesday, and there was no room for “more drift or delay”.
“Whenever there’s change there will be disruption. However, not everyone will agree. However, everyone will reap the benefits – a rising economy and a brighter future’.
We will see if the speech has the desired impact.
In the lead-up to Wednesday, Ms Truss focused relentlessly in her media interviews on the U turn she and Chancellor Kwarteng had to make on their signature reform element.
Birmingham saw more cabinet splits, indicating that the two will cut their welfare benefits next, despite the effects of the crisis.
After a showing of unity on Tuesday with Mr Kwarteng, Ms Truss claimed she did not lose control of her cabinet.
Suella Braverman accused party critics, seeking to set up a coup against Ms Truss, of showing little team spirit.
Braverman was a target of Michael Gove, the dissident leader. He continued his constant criticism of Ms Truss and stressed that all Conservative MPs were elected according to Mr Johnson’s 2019 manifesto.
“We have to believe in Boris,” Mr Gove stated, underscoring the fact that Ms Truss is yet to confront the UK electorate.
Reporters asked the ex-minister if she was going to survive past the end of this year. She replied, “Yes.”
James Cleverly was also a foreign minister and disassociated from the comments of Ms Braverman, but he did encourage colleagues to express their opinions in Cabinet.
As the Tories fall, opinion polls show that the Labour party is at the top of the list with 50 percent. This has caused nerves to fray in Birmingham during the conference’s four-day span.
Mr Kwarteng, who said that ‘polls do move down and up’ on Tuesday, stressed the fact that there were only two years until the next election, as well as the ‘eternity’ of politics.
It comes after IMF chief Kristalina Georgieva said Tuesday that the Bank of England (BoE) correctly moved swiftly in reaction to Britain’s budget proposal late last month – which consisted of £45billion in tax cuts.
She stressed the importance of avoiding contradictions between central bank policy and government policies.
“Fiscal policy cannot be used to counter monetary policy, by giving untargeted support,” she said. She said that it must be given to the most vulnerable sections of society in an interview with Al Arabiya.
She said that she had seen the UK’s contradiction between fiscal and monetary policy. However, Bank of England responded quickly.
She also noted that authorities have taken steps to make sure that the package remains consistent.