Triple AAA hubris

George Osborne

The announcement from credit ratings agency Moody’s that it has downgraded the UK from AAA to AA1 has more resonance politically than economically. Moody’s is simply reflecting what many economists already believe; the UK is weaker than it was and George Osborne’s plans are failing. The two other main credit ratings agencies, S&P and Fitch, still judge the UK’s rating to be AAA but both combine the rating with a negative outlook, suggesting they may downgrade.

Moody’s cites three interacting reasons for its downgrade:

•    The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;

•    The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;

•    And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.

Essentially, the UK growth outlook has deteriorated and this has consequences for getting public sector deficits down and for the ability of the UK to withstand another financial crisis. By focusing on ‘austerity’ too soon, the chancellor has undermined his own commitment to control the public finances. It was foolish for him to believe so strongly in his own grasp of economics and in his ability to maintain AAA ratings. Labour’s stance has been vindicated but only in the sense that the chancellor has been unable to achieve something he should not have attempted in the first place. The government’s economic credibility is declining but Labour has more to do to boost its own economic reputation amongst voters.

A downgrade was largely expected, a rating of AA1 is still good, and the opinion of a credit ratings agency is one among many. Moreover, Moody’s has combined the new rating with a stable outlook. However, the change does add to the current general and increasing sense that the UK economy is not in as strong a position as it should be, with high debt, a more relaxed approach to inflation, and the prospect of many more years of fiscal retrenchment. This is damaging because it is difficult to overcome these perceptions from global investors and businesses once they become established. Consider how long it took us to shake off our poor 1970s reputation for economic management, for example. At the moment, compared to eurozone countries, the UK is in a strong position. The unknown is: when global growth does pick up will we benefit or will low productivity, debt, and inflation hold us back?

The solution is, ultimately, growth. Significant and sustained measures to boost the supply side and increase demand are required. Much time has been lost and this means Labour cannot simply revisit what we were saying in the months following the 2010 general election. It seems unlikely the economy will respond to a short-term stimulus in the way it might have done a couple of years ago. Meanwhile, human and physical capital has been eroded as investment remains muted. That is why Labour should focus on investment as a key theme, with a decade-long commitment to boosting the productivity of our economy, together with control of current spending.

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Stephen Beer is a City investment manager and author of The Credibility Deficit – how to rebuild Labour’s economic reputation. This article represents his personal opinion.

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Photo: Ewan McIntosh

 

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