While many commentators and forecasters, us included, were keeping their powder dry ahead of the government’s Budget last week, rating agency Moody’s published its latest rating action on the UK sovereign with less than a week to go until the big event.
In the run-up to the Budget, speculation over potential policies was rife, with even the government itself adding to this by seemingly testing the waters on how certain measures might be received, by financial markets, fellow Labour MPs, as well as the voting public.
In a period of uncertainty and speculation Moody’s seemingly pushed the boat out and affirmed the UK sovereign long-term rating at Aa3, a rating it has placed on the UK for the last five years, as well as maintaining a ‘stable’ outlook .
The decision to affirm the rating was based on what Moody’s deemed to be the UK’s significant credit strengths, notably that it is a wealthy and diversified economy, underpinned by a strong institutional framework, including the independence of key institutions such as the Bank of England, Debt Management Office, and Office for Budget Responsibility (OBR).
In today’s fast-moving political and economic landscape, it can be easy to forget some of the UK’s positive attributes – the 6th largest economy in the world, and in the 90th percentile of the World Bank’s governance indicators on regulatory quality, rule of law and control of corruption to name just a few.
Moody’s notes that while the UK’s economic growth is weaker compared to before the global financial crisis, it is line, or possibly slightly better compared to its advanced economy peers. The UK’s demographic pressures, innovation capacity, labour market flexibility, and financial markets strengths, are all judged to be favourable compared to peers. Overall, Moody’s baseline forecast is for UK GDP growth to average around 1.5% going forward. Headwinds from trade tariffs are also deemed more favourable compared to many other competitor countries.
The affirmation also incorporated Moody’s expectation that the fiscal measures in the (then) upcoming Budget would be consistent with the government’s fiscal rules, and its commitment to them, which will keep the cost of debt moderate and bring the public finances back in line with medium-term targets, taking into account the OBR’s assessment of weaker productivity.
Moody’s expected revenue-raising measures of around £30 billion in the Budget, together with other announcements that would provide confidence of ongoing government spending restraint. Slightly short of this figure, the OBR report published alongside the Budget, showed that the government’s measures were projected to raise taxes by £26 billion by 2029/30.
Moody’s cites its stable outlook as indicating balanced risks to the UK’s fiscal and economic outlook. It also notes that increased public investment and housing sector/planning system reforms could lead to better economic outcomes that it currently assumes, benefitting the UK’s fiscal and debt projections. Moreover, the UK could benefit from advances in artificial intelligence as well as improving ties with the European Union, both of which could help with GDP and therefore the fiscal position.
On the flip side, however, many challenges remain to the outlook, notably from spending on welfare, health and social care, and more recently on defence. The UK also spends more on debt interest than many of its close peers, a factor that would limit its fiscal room to absorb further economic shocks.
Overall, Moody’s viewed the risks around the UK’s economic and fiscal outlook to be broadly balanced. There are challenges to the economy and finances from higher government spending, debt costs and weaker growth, but measures are being put in place which could provide better economic prospects over the medium-term.
As always, our work on the creditworthiness of the institutions that underpin our advice remains a crucial element of our services. For any readers wanting to find out more about how our service we can help, please get in touch at info@arlingclose.com.
11/12/2025
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