Keir StarmerFitch Affirms United Kingdom at ‘AA-‘ with Stable Outlook
Fitch Ratings has affirmed the United Kingdom’s credit rating: long-term ability to honor financial obligations at ‘AA-‘ with a stable outlook.
The UK’s ratings are supported by its high-income, large, diversified, and flexible economy; credible macroeconomic policy framework; and financing flexibility from deep capital markets and sterling’s international reserve currency status.
These factors are set against its high public and external debt and a debt interest/revenue ratio that is more than double the ‘AA’ peer group median. Fitch forecasts GDP growth of 1.2% in 2025 and 2026, partly reflecting further cooling of the labour market, with some offset from a lower drag from net exports next year.
The UK has low direct exposure to US tariffs, as the majority of its exports are in services, and the UK-US trade deal supports relatively low tariffs. However, greater global uncertainty and weaker external demand will dampen investment growth.
Fitch analysts project economic growth picks up to 1.5% in 2027, after four years of below-trend growth, as monetary policy easing feeds through to higher consumer spending. Productivity remains weak, and our assessment of UK potential GDP growth at 1.4% does not incorporate any significant uplift from reforms.
“We see moderate upside from deeper implementation of housing planning deregulation and sustained higher public capex, but their impact remains uncertain and mainly over a long horizon”.
Recent trade deals are not of a scale that will significantly boost growth, and ratings analysts do not anticipate markedly more far-reaching EU trade integration that would have a bigger impact. There is also a drag from a tightening of visa requirements announced in May.
Fitch forecasts the general government deficit to narrow 0.6 pp in 2025, to 5.3% of GDP, 4.7% in 2026 and 4.4% in 2027. This is around 0.7pp slower than government targets, leaving the deficit well above the ‘AA’ median of 2% in 2027.
Planned adjustment is mainly from revenue, mostly April’s rise in employer National Insurance contributions, alongside growing income tax.
Tax receipts for 2Q25 were in line with targets. We assume new autumn budget measures to compensate for recent reversals on winter fuel payments and benefits cuts (costing 0.2% GDP), and likely Office for Budget Responsibility growth downgrades will focus on lifting tax revenue.
Expected fiscal slippage against target partly reflects more challenging consolidation plans from 2026. Front-loaded departmental spending rises mean real-terms recurrent spending growth slows to 1% in FY27 (ending March 2028) to FY28, from an average of 2.5% in FY24 to FY25.
The near 3% annual real-terms rise in health contributes to several unprotected departments facing real-terms cuts, and plans rely on all departments making at least 5% savings and efficiencies by FY28.
Fitch also projects defence spending to rise by 2.8% of GDP in 2028, above the budgeted 2.6%, while longer-term pressures from defence, healthcare, and an aging population add to challenges to consolidate.
It said the success of Labour Party backbench MPs in preventing planned cuts to winter fuel payments and benefits, and the added political pressure from Labour Party losses in May’s local elections and its weaker polling since, have moderately increased budget execution risk, in our view.
Nevertheless, this is mitigated by Labour’s commanding parliamentary majority, the almost four years until the deadline for the next general election, and these policy reversals being in particularly politically sensitive areas.
Ratings analysts believe UK’s high debt constraint fiscal space, projected general government debt to rise 2.5pp in 2025 to 103.8% of GDP, 106% at end-2027, and very gradually in 2028-2029.
“Such high debt, about double the projected ‘AA’ median of 52.4%, limits fiscal room to respond to shocks without leading to pressure on creditworthiness”.
Successive shocks drove a 15.6pp rise in debt/GDP in 2019-2024, and the government’s latest plan left low headroom – just 0.3% of GDP – above the minimum required to comply with its deficit rule (for a balanced current budget by FY29).
This could also compromise its objective of reducing policy variability through the move to a single major fiscal event a year, Fitch hinted.
The shortening of the rolling forecast horizon to three years from five from 2026 will moderately reduce scope to delay fiscal measures needed to meet targets – a long-standing weakness of UK fiscal rules that contributed to sizeable slippages.
This will also align with three-year Spending Reviews now being required every two years (in contrast to the almost four-year gap to the previous one), improving the credibility of plans.
Fairly frequent changes to UK fiscal rules are a further weakness, but we consider chancellor Rachel Reeves more committed to them than her recent predecessors.
The ratings note indicated that UK has strong financing flexibility. Fiscal risks are mitigated by sterling’s reserve currency status, the UK’s deep capital markets, and the absence of foreign-currency debt.
The long average maturity of central government debt, at 13.9 years, limits the near-term impact of the marked rise in gilt yields (15bp-25bp of which the Bank of England estimates is from relatively fast quantitative tightening) – as has the lower cost of inflation-linked debt (which is 25% of the gilt portfolio).
“We project debt interest/revenue at 7.4% in 2027, similar to 2025, but well above the ‘AA’ median of 3.6%. Sustained higher-than-expected gilt yields are a key risk to our fiscal projections”.
Fitch forecasts inflation, which picked up to 3.8% in July, to fall to 2.8% at end-2025, on wage disinflation and a 7% drop in the energy price cap in 3Q25, although it sees the balance of risk to the upside, particularly given a recent rise in inflation expectations.
“We project inflation then declines more gradually, averaging 2.2% in 2026-2027, slightly above the Bank of England target of 2% and the ‘AA’ peer group median of 1.9%”.
Fitch assumes the policy interest rate is cut 25bp to 3.75% by 2025 year end and to 3% in 2027, in line with the neutral rate. #Fitch Affirms United Kingdom at ‘AA-‘ with Stable Outlook CBN Sells $166m to Banks, FX Forward Contracts Depreciate