LONDON (Reuters) - Ratings agency Moody’s said Britain’s government might struggle to make the kind of cuts to public spending it has announced as it seeks to keep narrowing its budget deficit.
British finance minister Philip Hammond said on Wednesday that he was on track to report the country’s lowest budget shortfall since 2002 for the 2017/18 financial year, at 2.2 percent of gross domestic product.
Excluding long-term investment, public finances are due to run a surplus next year, but Hammond still aims to lower the total deficit to 0.9 percent over the next five years so that debt as a share of gross domestic product (GDP) can fall faster.
Moody’s said this would be tricky, taking a similar line to the non-partisan Institute for Fiscal Studies a day earlier.
“It remains to be seen whether those cuts will be delivered, given the apparent strains on many public services after a decade of cuts and the political pressure on the government to increase funding for health care, defence and education,” the ratings agency said in a statement sent to media on Friday.
Moody’s downgraded Britain’s credit rating in September to Aa2, further below its top-notch AAA rating, saying the government’s plans to bring down its heavy debt load had been knocked off course and Brexit would weigh on the economy.
Britain’s government forecasts that its preferred measure of public debt will fall from 85.6 percent of GDP in the current financial year to 79.3 percent by 2021/22 - lower than the United States or Japan but well above Germany.
However, this measure is currently distorted upwards by the inclusion of temporary Bank of England lending to banks that is due to be repaid by February 2022.
Stripping this out, the true decline in the debt-to-GDP ratio would be less than 2 percentage points, Moody’s said.
Britain’s public debt ballooned during the 2008 financial crisis when annual borrowing reached almost 10 percent of GDP, and Hammond wants to reduce debt levels to allow more scope for borrowing during a future economic downturn.
Moody’s welcomed the government’s decision to reduce slightly the proportion of inflation-linked debt in its financing plans, which is the highest of any major economy.
“This will help to address a key longer-term risk ... namely the comparatively high sensitivity of the government’s interest bill to inflation,” Moody’s said.
Reporting by William Schomberg and David Milliken; editing by Kate Holton and Hugh Lawson