Moody’s, a prominent global rating agency, has indicated that the recent UK budget is unlikely to significantly decrease government debt or promote economic growth, expressing concern over the diminishing efficacy of fiscal policy in the country.

The agency noted that the government’s strategy of increasing taxes, expenditure, and borrowing presents further challenges to already complex fiscal consolidation efforts.

Moody’s predicts that the UK’s debt will remain above 100 percent of GDP for the foreseeable future, highlighting that frequent alterations to fiscal regulations have undermined their status as a reliable policy framework.

According to Moody’s, “A government’s ability to set achievable targets and maintain a history of fulfilling them is crucial in evaluating the quality of a country’s institutions and governance.” They observed that the effectiveness of the UK’s fiscal policy has degraded in recent years, particularly following the Brexit referendum in 2016. The agency currently rates the UK’s debt at AA with a stable outlook.

This week, investor anxiety over the announcement of an additional £30 billion in borrowing caused UK borrowing costs to spike to a one-year high. Consequently, gilts experienced the poorest returns compared to other major financial assets in October, per data from Deutsche Bank.

On Friday, government bond prices showed volatility, with the yield on ten-year gilts increasing by approximately 5 basis points (0.05 percentage points) by 2 PM, though still below the peak levels reached during Thursday’s market sell-off.

Throughout this week, two-year yields have risen by 20 basis points, marking the largest weekly increase since early this year, while five and ten-year yields climbed by over 15 basis points.

In a related statement, S&P, another leading ratings agency, mentioned that while increased government spending could provide a short-term boost to growth, it’s premature to assess its potential long-term impact on economic output.

S&P added that enhanced funding for public services may foster a more favorable business climate, emphasizing that improvements to the NHS and educational institutions would benefit corporations, albeit contingent on the effective allocation of the additional spending.

Pimco, the largest bond investment firm globally, has contended that UK bonds remain appealing, asserting that concerns about the government’s borrowing strategy and inflation threats may be exaggerated.

Peder Beck-Friis, an economist at Pimco, reassured listeners by stating, “We see no reason to question the government’s fiscal credibility.” He suggested that the Bank of England would likely maintain its course following the budget since the outlook for inflation and economic growth remains weak. The Bank is expected to announce its next interest rate decision next week, with indications pointing toward a reduction from 5 percent to 4.75 percent.

Beck-Friis concluded, “We don’t anticipate the budget will significantly alter the Bank of England’s outlook. In light of the budget, the market’s focus will likely shift back to the broader economic landscape and the signs of easing inflation alongside a cooling labor market.”

He acknowledged that while the budget might provide a slight boost to immediate demand, its impact will be minimal within the context of the overall growth expectations. The overarching perspective remains one of tightening fiscal policies and softening labor market conditions.