Britain faces years of ‘muted’ growth after Reeves’ Budget, warns Moody’s

Credit rating agency warns Chancellor’s decisions will put debt on an ‘upward trajectory’

Britain faces years of “muted” growth and higher borrowing costs after Rachel Reeves’ maiden Budget, Moody’s has warned.
In a note to investors, the leading credit rating agency warned the Chancellor’s decisions will put government debt “on a slow upward trajectory” and cast doubt on the credibility of new debt rules meant to reassure financial markets.
Moody’s also warned that higher spending on infrastructure would only boost growth if ministers successfully tackled issues that have dogged the UK economy for years, such as the worklessness crisis and long planning delays.
The agency’s note, published on Friday morning, warned that Ms Reeves’ debt-fuelled spending binge was the “most aggressive” since furlough and other Covid-era support measures.
“In our view, the increase in borrowing, which is in part supported by a new measure of debt under the fiscal framework, will pose an additional challenge for what are already difficult fiscal consolidation prospects,” it said.
“We expect growth in our baseline to remain muted… until structural constraints, including labour market inactivity that has worsened since the pandemic and persistent lacklustre productivity growth, are durably addressed.”
Moody’s is one of the “big three” credit rating agencies, alongside Standard and Poor’s and Fitch Ratings.
Standard and Poor’s also gave a downbeat assessment of the Budget on Friday, warning the Chancellor’s public spending binge would “keep pressure on the UK’s constrained public finances”.
The ratings agency warned that the Government’s plans would stoke inflationary forces, keeping interest rates higher for longer.
It said: “A higher interest rate, higher labour costs, and a higher tax burden could raise input costs for companies and delay the private sector investment recovery.”
Standard and Poor’s also warned of the risk that the enlarged UK state would remain at this size for the foreseeable future.
It said: “We note that public spending tends to be sticky and often difficult to roll back. Consequently, a hypothetical scenario in which public spending is permanently higher but the quality and accessibility of public services still doesn’t improve enough, could further complicate policy trade-offs in the future.”
Such pronouncements on a country’s debt and growth prospects are hugely influential and the verdicts will be seen as a blow to Ms Reeves’ efforts to establish credibility in financial markets. The Chancellor is already facing higher borrowing costs following her first Budget on Wednesday.
Bonds, shares and sterling tumbled on Thursday as traders dumped UK assets after the Chancellor raided the private sector to fund public sector spending increases.
Economists have also predicted she will be forced to borrow more or raise taxes again to balance the books, possibly as soon as the spring.
In the note on Friday, Moody’s made similarly gloomy predictions about the state of the UK economy, arguing that the Budget had not done enough to improve the overall state of the country’s finances.
The rating agency noted that government spending was now on course to rise by about £70bn a year, or 2pc of GDP, over the next five years, funded partly by tax rises but also by some £28bn of extra borrowing.
“As a result, the fiscal loosening set out in this Budget will be the most aggressive since the March-July 2020 measures announced during the pandemic,” the note said.
“In our view, the increase in borrowing will pose an additional challenge for what are already difficult fiscal consolidation prospects.”
It pointed to official forecasts by the Office for Budget Responsibility showing that public sector net borrowing was on course to be higher in every forecast year following Ms Reeves’ Budget, with debt set to be 3pc higher by 2028/29.
Moody’s also highlighted OBR forecasts that warned the cost of servicing Britain’s debt was likely to rise above £100bn a year for the rest of the decade, limiting the Government’s room for manoeuvre in the face of future crises.
This represents an extra £12bn a year compared with its March forecasts and is higher than the entire education budget.
While the Chancellor has argued that much of her extra borrowing will help deliver productivity improvements in the public sector, or fund new infrastructure to boost economic growth, Moody’s warned there was no guarantee these benefits would actually materialise.
“The extent to which new investment spending can raise growth potential will be limited unless structural constraints are durably addressed, which will prove difficult,” the agency said.
This risked leaving Ms Reeves with “only a limited buffer to absorb shocks”, it warned.
Moody’s also cast doubt on the credibility of the Chancellor’s new “fiscal rules” and “guardrails” on spending.
The fiscal rules are self-imposed targets for keeping debt within certain levels that are designed to reassure the bond markets used by the UK to borrow money. But they have been chopped and changed repeatedly by successive chancellors.
“In our view, frequent revisions to the UK’s fiscal rules over the last 10 years have weakened their effectiveness as a credible policy anchor,” Moody’s said. From now on, the Government’s credibility with financial markets would rest on an “ability to set realistic targets and develop a track record of meeting them”.
Moody’s said the higher borrowing costs the UK has faced since the pandemic – which has been dubbed a “moron premium” after Liz Truss’ mini-Budget triggered market chaos – were likely to remain for the foreseeable future.
Labour’s plan to boost growth through an industrial strategy is also unlikely to work, Moody’s claimed, with the agency arguing Britain “lacks the fiscal firepower and economic scale to compete with the US, European Union and China”.
Ms Reeves has insisted her plans will get debt falling, “fix the foundations” of Britain’s economy and repair public services.
On Friday, she said: “The number one commitment of this government is economic and fiscal stability.
“[On Wednesday] I set out a clear economic plan, with robust fiscal rules, that gets debt falling, balances the current budget within three years, while responsibly delivering the investment this country needs to support growth.”