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Moody's downgrade

UK’s credit rating cut over growth and Brexit fears

Wireline industry

Britain’s credit rating has been cut amid concern about the UK’s public finances and fears Brexit could damage the country’s economic growth.

A few hours after Prime Minister Theresa May set out plans for new ties with the European Union, Moody’s downgraded the UK to an Aa2 rating from Aa1. It said leaving the European Union was creating economic uncertainty at a time when the UK’s debt reduction plans were already off course.

A Moody’s official said Mrs May’sspeech made no difference to the agency’s gloomy long-term view for Britain’s economy.

Furthermore, the government is expected to ease austerity measures and raise public spending. It has abandoned the public sector pay cap and has made commitments to increase funding to Northern Ireland as a condition of securing the support of the DUP in the Commons. Slower growth will lead to lower tax receipts.

Britain has cut its budget deficit from about 10% of economic output in 2010 to 2.3% in the 2016/17 financial year, but the annual deficit is expected to rise this year following a period of declining household incomes.

Moody’s statement said: “Moody’s expects the budget deficit to remain at 3% to 3.5% of GDP in coming years against the government’s plan of a gradual reduction to below 1% in 2021/22.

“Fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union, and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics,”

Alastair Wilson, managing director of global sovereign risk at Moody‘s, said: “Having looked at Theresa May’s speech, I don’t think there is anything in there which would in any way make us change our assessment.

“Over the next few years, we have a lot less confidence that the UK’s government is going to be able to fulfil its plans to bring the debt load back down, and this is an extremely high debt load that the UK has, or to be able to achieve some form of agreement with the EU which retains a substantial share of the rights that membership of the EU grants.”

Downing Street said the firm’s Brexit assessments were “outdated”.  A Treasury spokesman said:  “The prime minister has just set out an ambitious vision for the UK’s future relationship with the EU, making clear that both sides will benefit from a new and unique partnership,

“We have made substantial progress in reducing the deficit while finding extra money for the NHS and social care at the same time. We are not complacent about the challenges ahead, but we are optimistic about our bright future.”

But Labour’s shadow chief secretary to the Treasury, Peter Dowd, called the downgrade a “hammer blow” to the economic credibility of the Conservatives and Chancellor Philip Hammond.

He pointed out that it was the second time the credit rating had shifted downwards under their government.

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