UK's commitment to fiscal rules crucial for credit rating, Fitch says

By Marc Jones

LONDON (Reuters) -The UK government's commitment to its own fiscal rules to balance the budget by 2029/30 remains vital for the country's AA- credit rating, credit agency Fitch said.

UK bond markets reacted badly on Friday to a report that British finance minister Rachel Reeves had scrapped plans to raise income tax rates in this month's budget in a bid to avoid further political backlash for the government.

"We’re not saying that the growth side is not necessarily relevant, but for the way that we think about it, to have the commitment to the fiscal framework is very important," Fitch's head of Western Europe Sovereigns ratings Federico Barriga-Salazar told Reuters on Friday.

"If we see that there is less of that, then the risk on the fiscal side will be higher."

Barriga-Salazar said there was bound to be plenty of "political noise" about plans to fill the fiscal gaps, but that it didn't fundamentally change Fitch's baseline assumptions.

It reaffirmed the 'stable' outlook on its AA- UK rating in August, forecasting that the government's deficit would narrow 0.6 percentage points to 5.3% of GDP this year, dropping to 4.7% in 2026 and 4.4% in 2027.

Those levels, however, are well above the 2% median AA rating bracket countries are predicted to have in 2027. The UK's forecast 106% debt-to-GDP ratio at that point is also almost double the projected AA-rated sovereign median of 52%.

"We still think that they have that commitment to following the fiscal rules, so there, for example, we see less of a risk at the moment than in France."

(Reporting by Marc Jones; editing by Elaine Hardcastle)