Budget will do little to reduce debt, Moody’s warns

The budget will do little to reduce government debt or stimulate growth, one of the world’s leading rating agencies has said, warning of the “eroding” effectiveness of fiscal policy in the UK.
Moody’s, one of the world’s three major ratings agencies, said that the government’s plans to expand taxes, spending and borrowing “pose an additional challenge for what are already difficult fiscal consolidation prospects”.
The agency said the UK’s debt would not fall below 100 per cent of GDP in the next few years, and that frequent changes to fiscal rules “have weakened their effectiveness as a credible policy anchor”.
“A government’s ability to set realistic targets and develop a track record of meeting them is a key component of our assessment of the quality of a sovereign’s institutions and governance,” Moody’s said. “The UK’s fiscal policy effectiveness has been eroded in recent years, and particularly since the Brexit vote in 2016.” The agency rates the UK’s debt as AA with a stable outlook.
Investors pushed the UK’s borrowing costs to a one-year high this week, taking fright at the prospect of £30 billion in extra borrowing announced in the budget. A sell-off means gilts delivered the worst return of any major financial asset in October, according to figures from Deutsche Bank.
The price of government bonds remained jittery on Friday with the yield, or interest rate, paid on ten-year gilts up around 5 basis points (0.05 percentage points) at 2pm but below the 12-month highs hit at the height of Thursday’s sell-off.
Since the start of the week, two-year yields are up by 20 basis points, which would be the biggest weekly rise since the start of the year, while five and ten-year yields are up more than 15 basis points.
S&P, one of the other major ratings agencies, said increased government spending would “mechanically boost growth in the short term, but it’s too early to tell how much this will add to potential output in the long term”.
It said more spending on public services should also “create a more business-friendly environment”, pointing out that improvements to the NHS and schools would benefit companies. However, “reaping those potential benefits will also depend on whether the spending is deployed in an effective way”.
Pimco, the world’s largest bond fund, meanwhile argued that UK bonds remained “attractive” and that fears over the government’s borrowing plans and the threat of rising inflation had been overstated.
“We see no reason to question the government’s fiscal credibility,” Peder Beck-Friis, an economist at Pimco, told The Times.
Beck-Friis said that the Bank of England would not be forced to change course after the budget as the outlook for inflation and economic growth remain weak. The Bank makes its next interest rate decision next week and is widely expected to reduce rates from 5 per cent to 4.75 per cent.
“We don’t think the budget changes the Bank of England’s outlook meaningfully. With the budget behind us, the market will shift focus from fiscal policy back to the macro backdrop and back to inflation softening and the labour market cooling down,” Beck Friis said.
“It is possible that the budget might add to near-term demand but this is small given the overall growth outlook. The fundamental outlook is still one of tightening fiscal policy and loosening labour market conditions.”