Global Market | |
Global Market | |
859 VIEWS | |
![]() | |
PROSHARE | |
PROSHARE |
Tuesday, November 19, 2019 / 11:20 AM / Fitch Ratings / Header Image Credit: Daily Kos
Spending plans from the two largest UK political
parties suggest that the period of budget deficit reduction is over, Fitch
Ratings says. We anticipated fiscal loosening when we affirmed the UK's 'AA'
sovereign rating in October but, while the scale and timing remains uncertain,
risks to our fiscal projections have risen substantially.
Chancellor Sajid Javid and his opposition
counterpart John McDonnell set out spending plans on 7 November as part of
their election campaigns. The Conservatives' new fiscal rules would allow an
extra GBP22 billion of public sector net investment annually, while the
opposition Labour Party would allow an extra GBP55 billion. The announcements
are consistent with our view in last month's rating review that 'austerity
fatigue' and Brexit preparations are set to reverse the path of expenditure
restraint seen since 2010.
December's election is unpredictable and could
result in a majority government committed to take the UK out of the EU by the
end-January, or a hung parliament or coalition and a second referendum. No-deal
can't be excluded until the Withdrawal Agreement (WA) is approved by the UK
Parliament and ratified, and the WA bill enacted. Trade 'cliff edge' risks
would linger until the new UK-EU relationship is negotiated. Brexit is key to
resolving the UK's Rating Watch Negative (RWN), which reflects the substantial
economic disruption no-deal would cause the UK, as well as the potential for an
agreed future UK-EU relationship to have an adverse economic impact.
The future direction of the UK rating will also
reflect economic and fiscal policy choices and outturns. Post-election fiscal
settings are hard to predict. Higher spending commitments are common in
election campaigns but not always implemented in full, while large
infrastructure projects take time to execute.
Neither party has abandoned the concept of fiscal
rules. A Conservative government would target a current budget balance (i.e.
excluding capex) within three years. Debt interest payments would be capped at
6% of revenues (from 4.5% currently) and public sector net investment capped at
3% of GDP. Debt-to-GDP would fall over the next parliament. Labour would also
cap interest payments, but at 10% of revenues, and has replaced its target of
falling debt-to-GDP with improving 'the overall balance sheet by the end of the
Parliament'.
UK fiscal rules have been re-written frequently in
recent years. These proposed new rules would allow for substantial fiscal
loosening, increasing uncertainty around the fiscal outlook and risks to our
projections. At last month's UK review, we used the government's 4 September
spending round as the main indicator of likely spending increases (assuming
slower implementation). These projections saw the deficit widening to 2.5% of
GDP by 2021 from 2.3% in 2019, but general government debt would still fall
slowly.
Our projections assumed that revenue-to-GDP ratio
remained broadly stable, consistent with the fact that the UK's large fiscal
adjustment has chiefly been through expenditure measures. We expect more
clarity about revenue measures and spending plans in areas other than
investment when the manifestos are published. This could shed further light on
the credibility of fiscal plans.
Any surge in investment would likely boost GDP, but
would need to be appropriately targeted to boost UK productivity and potential
growth. Recent data revisions suggest the growth impact of Brexit uncertainty
was less severe than previously thought, but we believe underlying economic
momentum remains fragile.
We will continue to assess how far policy settings
might reduce the UK's fiscal headroom at its present rating level beyond the
election as part of our sovereign analysis, in the context of domestic
political and Brexit outcomes.
Related News