Moody's affirms UK's Aa3 rating as stable on fiscal commitment

The agency expects the upcoming 2026 Budget, scheduled for November 26, to outline fiscal measures aligned with the UK’s self-imposed fiscal rules. It further anticipates revenue-raising steps and moderate spending restraint worth around £30 billion—roughly 1 per cent of GDP—designed to keep borrowing costs contained.

Despite this, it forecasts only gradual deficit reduction, with the general government debt ratio rising from about 103 per cent of GDP in 2025 to just below 107 per cent by the decade’s end. Debt affordability is expected to stabilise around 8 per cent of government revenues, supported by lower inflation and a lower policy rate, Moody’s said in a press release.

Moody’s stable outlook reflects balanced risks to both the economic and fiscal trajectory. Stronger-than-expected outcomes could stem from the government's push to lift productivity through a large multiyear public-investment programme and reforms aimed at easing land-use and planning constraints. The UK could also outperform peers in adopting artificial intelligence, given its advanced digital infrastructure, skilled workforce and supportive regulatory environment. Improved cooperation with the EU on defence, security and potentially economic matters may further support growth.

At the same time, the agency warned of downside risks related to the political and operational challenges of sustained fiscal consolidation. Recent reversals in proposed welfare savings highlight the pressures policymakers face, while long-standing spending needs in health, social care and defence continue to rise. With already elevated debt levels and relatively high interest spending compared with similarly rated countries, the UK has limited fiscal room to absorb future shocks.

In parallel actions, Moody’s affirmed the Bank of England’s Aa3 long-term ratings and Prime-1 short-term issuer ratings, maintaining a stable outlook. The central bank’s ratings remain aligned with those of the sovereign, reflecting its essential role in the UK’s economic framework and full government ownership.

Economic growth is expected to remain moderate at around 1.5 per cent per year, broadly comparable to peers, while demographic pressures remain relatively manageable. Despite weaker performance since the global financial crisis, the UK continues to demonstrate structural advantages in innovation, labour-market flexibility and financial-market depth, added the release.

The agency assigned the UK an ESG Credit Impact Score of CIS-2, reflecting low environmental and social exposure and strong governance, typical of advanced economies. Core metrics for 2024 include GDP per capita of $62,011 (PPP), real GDP growth of 1.1 per cent, inflation at 2.6 per cent, a fiscal deficit of 5.9 per cent of GDP, a current-account deficit of 2.2 per cent and external debt at 270 per cent of GDP.

ALCHEMPro News Desk (SG)