Welfare cuts U-turn shows extent of UK's fiscal challenges, S&P says

By Marc Jones

LONDON, July 4 (Reuters) - The inability of Britain's government to make cuts to welfare spending this week underscores the extent of the challenges it faces in repairing its finances, credit rating agency S&P Global said on Friday.

UK Prime Minister Keir Starmer was forced to scrap 5 billion pounds ($6.83 billion) worth of benefits cuts due to opposition from within his own government, reducing the already razor-thin margin it relies on to meet its self-imposed fiscal rules.

"We consider the inability to make modest cuts to welfare spending, which has ballooned in the UK since the 2020 pandemic, underscores the UK government's very limited budgetary room for manoeuvre," S&P said in an analysis.

S&P has a "stable" outlook on its AA UK credit rating and though it sees the fiscal position as "vulnerable" it said the direct effect of this week's last-minute policy reversal was small in the context of the country's "existing fiscal challenges".

The now-cancelled 5 billion-pound-a-year of mainly disability allowance cuts would have amounted to 0.2% of 2025 GDP, by 2029. That compares with last year's headline government deficit of 5.9% of GDP - equivalent to almost 170 billion pounds.

"Getting the deficit down to the pre-pandemic five-year average of 3% of GDP would require a roughly 70 billion pound consolidation effort," said S&P, which is next due to review Britain's rating on October 10.

"We expect that the UK's fiscal consolidation will remain a slow process," it added. ($1 = 0.7321 pounds) (Reporting by Marc Jones; Editing by Amanda Cooper and Barbara Lewis)