Madrid. The UK government’s ‘mini-budget’ risks reversing the debt-to-GDP trajectory in the medium term. However, this can be mitigated if growth policies are able to shift potential economic output despite rising inflation and monetary tightening.
The UK (rating ‘AA’ / ‘stable’) faces a prolonged period of high budget deficit Because of tax cuts and increased government spending to reduce energy prices for households for two years.
We estimate that the UK debt-to-GDP ratio will return to pandemic-era levels in 2027, while we were expecting before to decline. Maintaining debt stability relative to GDP requires a significant and sustained increase in the growth potential of the economy, which will take some time to materialize at best.
Expansionary fiscal policy will increase the budget deficit to about 7% of GDP in 2023, just below the 8% deficit reached in 2021 at the height of the pandemic. Additionally, the deficit is expected to stabilize at 5% of GDP, bringing the debt-to-GDP ratio to 95% in 2027 from 91% today (Chart 1).
In terms of economic output, The government’s target of increasing potential GDP growth to 2.5% annually is well above our current forecast of around 1.5%. To keep public debt stable relative to GDP, we estimate that economic growth would need to increase at least 0.8 percentage points above current forecasts each year. This will be growth we haven’t seen in the UK since the decade leading up to 2008, which has proven impossible to sustain.
Eiko Sievert is responsible for the sovereign and public sector ratings of Scope Ratings.
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