Next UK government faces credit rating challenge, S&P says

Official forecasts show debt falling only from the 2028/29 fiscal year. But S&P also expects Britain's budget deficit to be above 3% of GDP in 2026, down from 6% last year but higher than the official forecasts, given the implausibility of some of the government's promises to limit spending increases and the likelihood that an expensive fuel duty freeze will continue.

Britain's next government will have to tread carefully to avoid jeopardizing the country's already diminished credit rating with the public finances under heavy strain, a senior analyst with S&P Global Ratings said.

Maxim Rybnikov, S&P's primary sovereign analyst for the United Kingdom, said whoever wins the election expected later this year will have to balance growing demands for more spending on services such as healthcare with the need to fix the public finances. "We do see fiscal risks," Rybnikov said in an interview on Wednesday. "The picture is improving but we still see them and we think that it's going to be not an easy position for the incoming administration to manage that."

Britain's opposition Labour Party, which is far ahead in opinion polls, has promised to stick with the current Conservative government's target of bringing down debt as a share of economic output between the fourth and fifth year in forecasts produced by Britain's budget watchdog. Prime Minister Rishi Sunak is barely on course to hit that target and Labour is likely to come under pressure to spend more on public services with polls showing widespread dissatisfaction about the state of healthcare, education, and housing.

S&P cut Britain's credit rating by two notches from 'AAA' to 'AA' after the 2016 Brexit referendum decision and warned of another possible downgrade following former Prime Minister Liz Truss's 'mini-budget' huge tax cut programme announced in 2022. That 'negative' outlook was restored to 'stable' in 2023 after most of Truss's agenda was dumped by her successor Rishi Sunak.

"These things have moved back from the fore to some degree and the focus is really on the fiscal in both the upside potential and downside potential for the rating at the moment," Rybnikov told Reuters. GROWTH OUTLOOK

On the positive side for Britain's economy, growth is likely to gather pace to around its non-inflationary speed limit of 1.7% a year by 2026, faster than in the eurozone with Germany likely to be growing by less than 1% a year, S&P estimates. Britain's growing population, boosted by migration and which contrasts with expected demographic declines in Germany and Italy, should help to sustain overall economic growth although on a per capita basis the outlook is weaker, S&P economist Marion Amiot said.

Asked about Labour's plans to tweak the current government's secondary budget rule on borrowing levels to allow for more public investment, Rybnikov said public spending that increases the ability of the economy to grow was important. "Nevertheless, that doesn't mean that if significant fiscal deficits are going into investment, we're going to disregard them," he said. "Regardless of what you spend on, the fiscal position is constrained."

S&P expects its measure of net public debt in Britain to peak this year at around 96.5% of gross domestic product before falling only very slowly. Official forecasts show debt falling only from the 2028/29 fiscal year.

But S&P also expects Britain's budget deficit to be above 3% of GDP in 2026, down from 6% last year but higher than the official forecasts, given the implausibility of some of the government's promises to limit spending increases and the likelihood that an expensive fuel duty freeze will continue. "The room for manoeuvre is less than five years ago and much less than it was 15 years ago," Rybnikov said. "Any future government, regardless of their policy ideas, would have to deal with that." 

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