The Loss of AAA is a Mild National Humiliation - Now Let's Get Serious About Generating Growth & Cutting Spending
23 Feb 2013 at 17:06
There’s been a lot of hypocritical comment since it was announced Britain’s credit rating had been downgraded from AAA to AA1. With a few exceptions people on the right are making out there’s nothing to see and people should move along and these credit ratings Johnnies don’t really know what they’re talking about, and people on the left are rejoicing furiously at the Chancellor’s discomfort. Both attitudes are pretty unedifying.
To any Tories who can’t see what the issue is, just imagine if this had happened if Labour were in power. Just imagine what George Osborne would now be saying. That in itself ought to give some people pause for thought. But not a bit of it. They rest on the laurel that the markets had seen this coming and had already discounted it. In theory that’s a fair point, but it avoids the political embarrassment that it brings to a Chancellor whose whole economic strategy was built on our AAA status being maintained. Interestingly when I interviewed Ed Balls a few weeks ago he didn’t seem at all bothered by the prospect of our status being diminished. Indeed today he told Today…
I have always said… that you should not set your policy by the credit ratings agencies. They have got things wrong in the past.
David Blanchflower took a similar view when I interviewed him recently. I rather disagree with them. I regard it as a slight national humiliation. I console myself that it happened to the French a year ago. Why do I think this? Well it’s quite simple. In1967 when the Pound was devalued, our credit status remained AAA. During the strikes of the 1970s and the Winter of discontent it remained unchanged. After Black Wednesday in 1992, no one even speculated about our credit rating, and even in the immediate aftermath of the 2008 banking crisis there was no move. However, having said that, only Germany and Canada, of the major economies, now have a AAA rating, so I suppose that needs to be born in mind.
Economically it may not have much effect, but if it further weakens the value of the pound, sucks in imports and inflation, that would be a very serious matter indeed.
Having said all that, it is quite clear that the real reason for the downgrade is that our structural debt is not being cut. Indeed, it is rising. It’s all very well for George Osborne to trot out the old chestnut that the deficit has been cut by 25%, but he’s been saying that for at least a year. I would have expected that cut to have reached 40% by now. The only way the structural deficit will be cut is when we have made far more serious inroads into the PSBR. What we need now is a serious attempt to rein in government spending and an even more serious attempt to inject some growth into the economy. Our national spending now tops £700 billion. I’m afraid to say, and this will be unpalatable to anyone left of me, that government spending needs to be reduced not by the odd billion, but by £100 billion or more. We simply cannot afford to maintain expenditure at current levels if the structural deficit is to be attacked properly.
In terms of going for growth, let’s not make the same kind of mistakes that Tony Barber made in the early 1970s and fuel an inflationary boom. Tax cuts can certainly inject growth into the economy and may generate higher tax revenues, but what we need is for people to spend money on goods and services made in the UK. the last things we need is to suck in a load of white goods imports and cars. Apart from benefiting retailers, how would that help the rest of the economy?
Most commentators have just commented on the headline of the AAA cut. Very few seem to have actually read what Moody’s actually said. It’s worth doing so HERE. Their message is clear and it is one which is both sensible and direct. Redouble efforts to deal with your debt and concentrate on creating the economic conditions for renewed growth. It will take time, much more time, to recover than in previous recessions and people need to be prepared for that.
Finally, let’s turn to how this affects George Osborne. He’s appeared on the broadcast media today giving out the message of ‘steady as she goes’ and that this doesn’t affect the Government’s economic strategy, and indeed, it reinforces it. That’s all fine and dandy but surely not even George Osborne’s biggest fan can deny that this has damaged him politically. This is what the 2010 Conservative manifesto said…
We will safeguard britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament.”
Others have provided examples of many occasions when the Chancellor has emphasised the importance of retaining our AAA status so I won’t repeat them all here, It simply treats us all as idiots to pretend that the politics of the economy haven’t now changed. They have, and I suspect the budget George Osborne delivers next month may well be rather different to the Draft Budget currently sitting in the Chancellor’s In Tray. He needs to achieve three things in the next budget…
1. To retain the confidence of the international markets, sustain the value of the Pound and keep interest rates low
2. Make proper inroads into both the budget deficit and structural debt
3. Announce new measures to achieve quick, but lasting and non-inflationary economic growth
The big question is, can this be done in time for people to notice any difference by May 2015, the date of the next election? I can’t be alone in habouring major doubts.