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Disputes within the UK government threaten its ability to cut the budget deficit this parliament, Moody’s has warned, after the chancellor’s attempt to increase national insurance for self-employed workers saw him come under attack from many in his own party.
The ratings agency said opposition to the tax rise “raises some concerns over the feasibility of a balanced approach to fiscal consolidation”. The Conservative party’s manifesto for the 2015 election pledged not to raise the main rates of national insurance, income tax or VAT, but Moody’s said “such self-imposed constraints limit the government’s fiscal flexibility to an important extent”.
In his budget speech last week Philip Hammond predicted that the UK’s deficit would be smaller than expected this fiscal year, and unchanged at 1 per cent by the end of this parliament. However, in its review of the budget issued on Tuesday, Moody’s said “uncertainty over the feasibility of the mostly expenditure-focused fiscal consolidation strategy has – if anything – increased”.
Analysts at the ratings agency argued that the government’s medium-term plans depend on intended spending cuts that are “ambitious and subject to implementation risks”, with significant pressures for higher spending in areas such as healthcare.
It added that uncertainty over the terms of Brexit cast a further cloud over the UK’s credit outlook, reiterating its earlier warning that its sovereign credit rating could be downgraded if negotiations are “protracted” or suggest the UK is likely to lose access to “core elements” of the EU’s single market.