Moody's warns UK unfunded tax cuts are 'credit negative'

SYDNEY (Reuters) - Global ratings agency Moody's has warned the British government that plans for unfunded tax cuts could lead to larger budget deficits and higher interest rates, threatening the country's credibility with investors.

In a blunt release the agency said large unfunded tax cuts were "credit negative", leading to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure.

"A sustained confidence shock arising from market concerns over the credibility of the government's fiscal strategy that resulted in structurally higher funding costs could more permanently weaken the UK's debt affordability," Moody's said.

Debt-funded fiscal stimulus would only add to already sky-high inflation, particularly if sterling remained near record lows, and could prompt a more aggressive tightening cycle from the Bank of England, the agency said.

The pound tumbled to an all-time low of $1.0327 on Monday while bond yields surged as investors demanded a higher risk premia for holding British assets.

Moody's said it had lifted its forecast for UK economic growth to 3.3% for 2022, from 3.0%, but cut its 2023 forecast to 0.3%, from 0.9%, and did not expect growth to return to potential until 2026.

(Reporting by Wayne Cole; Editing by Shri Navaratnam)