Britain ‘vulnerable’ after Labour reversals, warns credit ratings giant

Britain’s public finances have been left “vulnerable” by Sir Keir Starmer’s about-turn on welfare cuts, the world’s largest credit ratings agency has warned.

S&P Global said the inability to make “modest cuts” to the welfare budget showed Rachel Reeves faced a “formidable political challenge” to keep spending 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,” the agency told clients.

A failure to rein in runaway public spending could leave Britain ill-prepared for future potential financial crises.

S&P warned that the Government had shown an inability to tackle spending, including the proposed £5bn welfare cut, meaning it had “very limited budgetary room for manoeuvre”.

The agency said high spending would also keep government borrowing costs higher for longer as the UK’s credit rating would not improve until its finances were in check.

It said: “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.”

Sir Keir was forced to gut planned welfare reforms to avoid an embarrassing defeat in the Commons on Tuesday. The 11th-hour climbdown means the legislation will deliver no savings and will blow a £5bn hole in Ms Reeves’s budget.

S&P Global said the episode had brought into question whether the Chancellor could balance the nation’s books as planned. The credit ratings agency expects the UK deficit to be reduced only slightly from 5.9pc of GDP last year to 5.5pc this year.

Ratings agencies are used by the world’s investors to assess the creditworthiness of borrowers, including countries. The industry is dominated by just three companies, of which S&P Global is the world’s biggest. As such, its verdict on Britain’s finances is hugely influential.

S&P’s update does not suggest it is considering changing the UK’s current credit rating. However, it will be seen as a warning to the Government about the urgency with which it must tackle the public finances. It comes a day after major bond investor Legal & General warned that repeated policy changes from Labour had shaken investors’ faith in the Government’s plans.

The cost of government borrowing on Friday remained higher than before Tuesday’s vote on the Universal Credit and Personal Independence Payment Bill.

The yield on 10-year UK gilts – a benchmark for the cost of servicing the national debt – stood at 4.53pc, compared to 4.45pc before Tuesday’s vote.

Jack Meaning, an economist at Barclays, said extra spending on benefits and anticipated cuts to the growth outlook meant “the Chancellor’s fiscal rules [were] highly likely to be breached at the autumn Budget”.

“The fragility of the fiscal position has come into focus, making tax increases in the autumn almost inevitable,” he said, predicting an extension to the long freeze to income tax thresholds.

Salman Ahmed, at investment giant Fidelity International, by contrast said the Chancellor may put off balancing the books in the autumn and instead hope for growth to come to the rescue.

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