London: A top US credit rating agency has lowered its outlook for British government debt from "stable" to "negative" amid the fallout from Prime Minister Liz Truss's mini-budget fiasco, media reports said.
The firm Fitch announced that Chancellor Kwasi Kwarteng's "unfunded fiscal package" could lead to "significant increase in fiscal deficits over the medium term", Daily Mail reported.
It followed a similar move by rival Standard & Poor's (S&P's) a few days ago, however Fitch maintained its 'AA-' credit rating for the UK, which is one level lower than S&P's, citing the government's "weakened political capital".
It comes after Kwarteng's mini-budget announcement on September 23 promised 45 billion pounds in tax cuts, which spooked markets and sent the pound plummeting against the dollar.
The Bank of England (BoE) was forced to step in and purchase up to 65 billion pounds in government debt in a bid to shore up confidence and prevent pension funds collapsing.
Following backlash from voters and MPs, Ms Truss and Kwarteng were forced into a humiliating U-turn, ditching plans to abolish the 45p top rate of tax. However Fitch said this was not enough to allay concerns, Daily Mail reported.
"The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term", Fitch said in a statement.
"We consider that statements by the Chancellor hinting at the possibility of additional tax cuts and the likely modification of fiscal rules legislated in January reduce the predictability of fiscal policy."
It added:
"Although the government reversed the elimination of the 45p top rate tax... the government's weakened political capital could further undermine the credibility of and support for the government's fiscal strategy."
Meanwhile, pension funds managing vast sums on behalf of retirees across Britain came close to collapse amid an "unprecedented" meltdown in UK government bond markets after Kwasi Kwarteng's mini-budget, the Bank of England said, the media reported.
Explaining its emergency intervention to calm turmoil in financial markets last week, the central bank said pension funds with more than 1 trillion pounds invested in them came under severe strain with a "large number" in danger of going bust, The Guardian reported.
The Bank said a dramatic rise for interest rates on long-dated UK government bonds in the days immediately after the chancellor's mini-budget had triggered a "self-reinforcing" spiral in debt markets, putting the stability of Britain's financial system at risk.
Had the Bank not intervened with a promise to buy up to 65 billion pounds of government debt, funds managing money on behalf of pensioners across the country "would have been left with negative net asset value" and cash demands they could not have met.
"As a result, it was likely that these funds would have to begin the process of winding up the following morning," the Bank said, The Guardian reported.
The central bank said the meltdown was at risk of rippling through the UK financial system, which could have then caused "excessive and sudden tightening of financing conditions for the real economy".
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