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UK: Waiting For a Credible Medium-term Fiscal Strategy

In DBRS Morningstar's view, the fiscal deterioration resulting from the measures presented by the UK government in September could ultimately pose some downside risks to the UK's rating (AA (high), Stable). In the absence of offsetting fiscal measures, the recently-announced tax cuts and support measures are set to lead to a wider fiscal deficit and a higher public sector debt ratio. In the medium to longer term, economic growth alone is unlikely to place the government debt ratio on a downward trajectory. In our view, the government will need to clarify its fiscal targets and present a credible medium-term fiscal strategy to return public finances to a healthy path over time.

The UK retains a high degree of economic and financial flexibility. The reserve currency status of the pound sterling, along with the UK's deep and liquid capital markets, supports the UK's significant degree of financing flexibility. The recent major financial volatility that has followed the announcement of measures could be a cause for concern if it turns more long lasting and has negative implications for the UK's financial flexibility. Nevertheless, higher borrowing costs are likely to be manageable, given the long average maturity of government debt. We will continue to monitor developments, including the extent to which the adverse market reaction could translate into a deterioration in the UK’s debt profile, and the authorities’ response to stabilise financial markets..

Key Highlights
• Given the nature of the fiscal package, we see with concern the absence of a credible medium-term fiscal strategy.
• In addition to a strategy to return public finances to a healthy path, the UK's financial flexibility is also key for our ratings on the UK.
• The markets reacted adversely to the government's fiscal plans, prompting the Bank of England to intervene to safeguard financial stability.

“The mini budget poses downside risks to the UK fiscal outlook. But the expected fiscal deterioration could be reversed over time with a credible medium-term fiscal strategy. On top of the government’s commitment and medium-term fiscal strategy, the financing flexibility of the UK remains key in our assessment,” said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group.