Credit ratings agency Fitch downgrades UK

Change from 'stable' to 'negative' was triggered by recent mini-budget fallout

The United Kingdom government came in for more criticism on Thursday over its handling of the nation's economy, with major ratings agency Fitch changing its credit outlook from "stable" to "negative".

The rating, which institutions such as the International Monetary Fund and the World Bank can use when determining the risk involved in loaning money, is a major indicator of the confidence the world has in a country.

The embarrassing reclassification was yet another indictment of the mini-budget the UK's finance minister, Chancellor of the Exchequer Kwasi Kwarteng, unveiled on Sept 23.

The mini-budget, which included plans to lower the tax burden on the UK's highest earners alongside massive government borrowing, sparked a backlash and triggered a sharp fall in the value of the pound, which slumped to an all-time low against the US dollar.

Despite a partial U-turn by Kwarteng and Prime Minister Liz Truss and a recovery in the value of the pound, critics said significant damage to the economy and the nation's reputation had been done.

Fitch said: "The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term."

Sky News said the downgrading of the credit rating outlook will pile more pressure on the pound and on Kwarteng and Truss, who took office weeks ago following a political coup that unseated Boris Johnson, the former prime minister.

Fitch said the downgraded credit outlook will not immediately impact the UK's overall investment score of AA, which, while short of the ideal AAA, is strong.

The agency said in its report that the harm done by the mini-budget was compounded by the government's initial refusal to let the independent Office for Budget Responsibility take a detailed look at it. The agency was also troubled by the government's interest in boosting demand through tax cuts while the Bank of England was trying to cool demand through higher interest rates.

"Although the government reversed the elimination of the 45 percent top rate tax ... the government's weakened political capital could further undermine the credibility of, and support for, the government's fiscal strategy," the credit rating agency added.

Fitch's downgrading followed a similar move by ratings agency Standard & Poor days earlier.

The Guardian newspaper noted that Fitch expects the UK government's deficit to reach 7.8 percent of gross domestic product this year, and 8.8 percent in 2023.

The BBC added that Kwarteng was planning to meet the bosses of several major banks to discuss the recent turmoil in financial markets, and its impact on mortgage rates, which have risen to a 14-year high of more than 6 percent for a typical two-year fixed-rate mortgage.