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A Shocking Ten Days for the UK

Recent policy decisions in the United Kingdom have jeopardized the country’s economic well-being and financial stability, with the most vulnerable segments of the population facing the greatest risks. But with rapid and coordinated action, policymakers can still change course.

CAMBRIDGE – The United Kingdom has had a sobering ten days, with its economy, financial system, and citizens’ well-being suddenly at risk. But with rapid and coordinated action, policymakers can still salvage the situation.

Last Friday, the ratings agency Standard & Poor’s placed the UK’s AA credit rating on “negative watch” – effectively threatening the country with a downgrade – over concerns that the new government’s proposed package of unfunded tax cuts (the “mini-budget”) will increase the country’s debt burden. A downgrade would become more likely if “economic growth turns out weaker due to further deterioration of the economic environment or if the government’s borrowing costs increase more than expected, driven by market forces and monetary-policy tightening.”

While S&P’s rating action will not materially affect the UK’s access to credit, it represented yet another embarrassment – along with extraordinary borrowing-cost volatility and a rebuke from the International Monetary Fund – for Prime Minister Liz Truss’s government. It further undermines three pillars of the UK’s well-being: policymaking credibility, economic performance, and financial-market integrity.

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