S&P Downgrades UK's Sovereign Credit Rating Outlook to 'Negative'... Aftermath of Tax Cut Policy

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] International credit rating agency Standard & Poor's (S&P) downgraded the outlook on the United Kingdom's sovereign credit rating to 'negative' on the 30th (local time).

According to major foreign media on the day, S&P maintained the UK's sovereign credit rating at 'AA' but lowered the rating outlook from 'stable' to 'negative.'

This reflects concerns following the UK government's tax cut policy announced last week, which raised fears of increased national debt and caused financial markets to fluctuate, including the pound sterling's value briefly falling to an all-time low.

When the rating outlook is lowered to 'negative,' it generally indicates a possibility of a downgrade in the sovereign credit rating.

S&P reversed its previous forecast that the UK's public sector debt would decrease, predicting instead that the debt level will enter an upward phase.

S&P pointed out, "The fiscal outlook will be affected by additional risk factors such as a decline in economic growth due to worsening economic conditions in the UK, or an increase in government borrowing costs beyond expectations due to market principles or austerity policies."

It also predicted, "The UK may experience a technical recession in the upcoming quarter, and the gross domestic product (GDP) is expected to shrink by 0.5% in 2023."

A technical recession is considered to occur when GDP growth is negative for two consecutive quarters.

After newly appointed UK Prime Minister Liz Truss took office, on the 23rd, Chancellor of the Exchequer Kwasi Kwarteng unveiled a massive tax cut policy worth ?45 billion (approximately 70 trillion won), including reductions in income tax and stamp duty, along with an energy subsidy support plan worth ?60 billion (approximately 94 trillion won).

However, the market's concerns grew that this tax cut, the largest in 50 years, would lead to a sharp increase in national debt and exacerbate inflation.

On the 26th, the market was shaken to the extent that the exchange rate of the British pound against the US dollar plunged to an all-time low of $1.03, but Prime Minister Truss remains determined to stick to the tax cut policy.