Fitch Affirms United Kingdom at ‘AA-’ With Stable Outlook
Fitch Ratings has affirmed the United Kingdom’s Long-Term Issuer Default Ratings (IDR) at ‘AA-’ with a stable outlook.
The UK’s ratings are supported by its high-income, large, diversified, and flexible economy, a credible macroeconomic policy framework, and financing flexibility from deep capital markets and sterling’s status as an international reserve currency, Fitch said.
Ratings analysts said these factors are set against its high public and external debt, and a debt interest/revenue ratio that is around double the ‘AA’ peer group median.
The change of Prime Minister to Andy Burnham is the sixth in just over 10 years, although his more commanding position within the ruling Labour Party and higher public approval ratings should support greater political stability for the remainder of this parliamentary term – which runs at the latest to July 2029.
Fitch does not anticipate a significant near-term change in fiscal rules or macroeconomic policy, consistent with statements by the new Prime Minister and Chancellor, although ratings analysts see somewhat greater fiscal policy uncertainty closer to the next election.
“We forecast the general government deficit will steadily narrow to 4.2% of GDP in 2028, from 5.2% in 2025, on tax rises, still well above the ‘AA’ median of 2.1%”.
This is around 0.8pp slower than the government’s target, reflecting expected spending overruns on plans to slow average real current spending growth to just 0.8% in FY27-FY29 (ending March 2030), and additional pressures, including on defence and social care.
Ratings analysts said the scope for new revenue-raising measures is limited by political pledges not to raise rates of income tax, VAT or National Insurance, and the historically high rate of tax/GDP already budgeted.
Ratings analysts said their expectation that fiscal policy will not be markedly loosened largely reflects financial market constraints, given the potential for a rise in already-elevated gilt yields to damage the economic credibility of the new leadership.
There is heightened focus on the fiscal rules to anchor policy, partly as a bulwark against higher spending pressures from elements of the Labour Party.
It also reflects some improvement in the credibility of the rules, notably by shortening the rolling forecast horizon from five to three years, which moderately reduces the scope to delay fiscal adjustment needed to meet them (a key weakness of successive UK fiscal rules).
Fitch forecasts general government debt will rise to 106% of GDP at end-2028, from 102.4% at end-2025, trending up more gradually thereafter.
Ratings analysts project debt interest/revenue averages 8.3% in 2027-2028, with the long average maturity of public debt, of 13.4 years (‘AA’ median eight years) and lower cost from next year of inflation-linked debt (which accounts for 24% of the debt portfolio) cushioning the near-term impact of relatively high gilt yields.
Fitch said such high debt/GDP and debt interest/revenue – both around double the peer group medians – limit the scope for further fiscal slippage without putting pressure on creditworthiness.
Ratings analysts at Fitch forecast real GDP growth of 0.9% in 2026 and 1.2% in 2027, 0.25pp slower on average than expected at our February review due to the drag from high energy prices, tighter funding conditions, and further labour market weakness.
“We project growth picks up in 2028 to just above the trend rate of 1.4%, still around half the ‘AA’ median of 2.9%. Risks to trend growth are balanced, with moderate upsides from faster progress on public investment plans, AI adoption, or more far-reaching EU trade integration than currently being negotiated, and downside from lower immigration following last year’s tightening of visa and permanent residency requirements.
Fitch projects inflation will rise from 2.6% in June to 3.7% by year-end, mainly due to energy price cap rises, before falling to 2% by the end of 2028, consistent with both the Bank of England target and the ‘AA’ median.
Ratings analysts forecast the Bank of England will hold the policy interest rate at 3.75% through 2026, cutting it from next year to reach 3% in 2028, in line with the neutral rate.
Fitch projects the current deficit will widen moderately this year due to higher energy imports, reverting to 3% of GDP in 2028, and net external debt will gradually rise to 28.5% of GDP in 2028.
External liquidity (liquid assets to short-term liabilities) has been stable in recent years and we anticipate it will remain unchanged in 2026 at 54%. The UK’s reserve currency status and the absence of government foreign-currency debt mitigate external and fiscal risks.
