Britain’s fiscal stability has been called into question by the world’s largest credit ratings agency following Labour’s abrupt reversal on welfare cuts.
S&P Global has warned that the government’s inability to implement even modest savings measures highlights the scale of the political and economic challenges now facing Chancellor Rachel Reeves.
The agency said the decision to scrap a proposed £5 billion cut to welfare spending has left the UK’s public finances vulnerable and raised doubts over the government’s broader ability to keep expenditure under control.
“In our view, it remains to be seen whether the Government succeeds in following through on its wider plans for keeping public spending in check, as announced in the June 2025 spending review,” S&P told investors.
The agency cautioned that continued high spending, combined with limited fiscal flexibility, could hamper the UK’s ability to respond to future economic shocks. It also warned that borrowing costs may remain elevated for longer, as investors wait for clearer signs of fiscal discipline.
“We consider the UK’s fiscal position as vulnerable and one of the key constraints on our ‘AA’ sovereign rating, We expect that UK budgetary consolidation will remain a slow process.”S&P said.
Earlier this week, Sir Keir Starmer was forced into a last-minute retreat on planned welfare reforms to avoid a damaging Commons defeat. The backtrack effectively neutralised the legislation’s intended savings and widened the budget shortfall by £5 billion.
The episode has cast serious doubt on the Chancellor’s ability to meet her fiscal targets. S&P now expects only a marginal reduction in the UK’s budget deficit, from 5.9% of GDP last year to 5.5% this year.
S&P yet to downgraded UK’s credit ratings
While S&P has not downgraded the UK’s credit rating, its warning adds to growing pressure on the government to clarify its fiscal strategy. Just a day earlier, major bond investor Legal & General raised concerns that Labour’s policy U-turns were undermining investor confidence.
Markets have already responded. The yield on 10-year UK government bonds – a key measure of borrowing costs – rose to 4.53% on Friday, up from 4.45% before the vote on the Universal Credit and Personal Independence Payment Bill.
Economists are now forecasting that Labour’s spending commitments could trigger further tax rises. Jack Meaning of Barclays said the combination of increased welfare spending and a weaker growth outlook made it highly likely that Reeves would breach her own fiscal rules in the autumn budget.
“The fragility of the fiscal position has come into focus, making tax increases in the autumn almost inevitable,” he said, suggesting the government could extend the ongoing freeze on income tax thresholds to raise revenue.
