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Sun, 7 June 2020

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Blow for Rishi Sunak as UK’s credit rating slashed amid coronavirus spending spree

Blow for Rishi Sunak as UK’s credit rating slashed amid coronavirus spending spree

Rishi Sunak and Boris Johnson

3 min read

Britain's credit ranking has been cut by a leading ratings agency after ministers turned on the public spending taps to try to soften the impact of the coronavirus outbreak.

In a blow for Chancellor Rishi Sunak, Fitch said there had been a "significant weakening" in the UK's public finances amid the Covid-19 epidemic, as it downgraded Britain's rating to AA- from AA.

And it warned of ongoing "uncertainty" over the UK's future trading relationship with the European Union.

The agency's new rating - which is used by international investors to judge the riskiness of buying government bonds - puts the UK economy on the same level as Belgium and the Czech Republic. 

Fitch's already-negative outlook has been maintained, with the agency estimating that the UK is now on course for a sharp economic contraction this year.

The agency estimates that the widespread shutdown of the UK economy will see it shrink by close to 4% in 2020, with growth of 3% predicted for 2021.

Fitch said: "The downgrade reflects a significant weakening of the UK’s public finances caused by the impact of the Covid-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent.

"The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship."

The ratings cut comes just three months after Fitch improved its assessment of the UK economy in the wake of Boris Johnson's general election victory.

Mr Sunak has so far unveiled a wave of measures aimed at shielding business and workers as they are ordered to stay at home to stop the spread of the virus.

They include an unprecedented commitment to pay 80% of the wages of workers who companies are considering laying off, with similar guarantees extended to self-employed workers this week.

The Government has also promised to stand behind £330bn-worth of business loans in a bid to stop firms going to the wall.

The Institute for Fiscal Studies think tank has warned that the levels of borrowing required to tackle the crisis could be more than treble the forecasts unveiled at Mr Sunak's Budget just weeks ago.

Isabel Stockton, a research economist at the IFS, said: "The response to the Covid-19 pandemic has led to a sharp downturn in economic activity. 

"It has also, rightly, prompted a substantial fiscal policy response, the cost of which will add directly to government borrowing. 

"The outlook is uncertain to say the least. Only taking account of measures announced so far, and even if the economy 'only' shrinks by 5% per cent this year, we might expect borrowing in the coming financial year to exceed £175 billion, or more than 8% of national income. 

"This would be more than triple the amount forecast in the Budget just two weeks ago. About 40% of that increase would result from new fiscal measures, and the rest from the economic downturn depressing revenues and adding to government spending."

She added: "Large increases in borrowing are well-advised to address the current crisis, but the consequences for the public finances will be felt long after the immediate public health emergency has hopefully passed. Debt which is already high by recent historical standards will jump up again and is likely to remain elevated for some time to come."

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