I am no fan of the rating agencies, but not for the usual reasons. Far from being too harsh, or too ruthless, these bodies are invariably too soft, too backwards-looking and cautious. Their decisions are always months out of date and they utterly failed during the bubble. But Fitch’s reasoning looks plausible in this case. It highlighted “the risks posed to economic recovery by ongoing financial tensions in the Eurozone and against the backdrop of a still large structural budget deficit and high and rising government debt.” All of this makes sense.
The data is foggy and hard to decipher; so it is tricky to predict what the first quarter’s GDP performance will be, let alone that of the remainder of the year. Plenty of green shoots are visible – but that has been the case for two years now, and actual, official recorded growth has disappointed.
But while the public finances have been doing better than expected so far this fiscal year, thanks to lower than expected spending, the jobs market remains stagnant, as yesterday’s unemployment figures showed, while wages have taken a hit. Around 45,000 net new jobs were created in the private sector between November and January, which wasn’t great but nevertheless enough to mop up the 37,000 jobs lost in the public sector. But the surprise was that pay rose by just 1.4 per cent year on year in the three months to January as a result of collapsing bonuses. This amounts to a large fall in real terms, will hit spending and means income tax receipts will disappoint.
Although Fitch did not put it in this way, the UK’s problems are simple: the government is spending far too much and the economy is not growing quickly enough. The OECD estimates public spending was a crippling 49.8 per cent of GDP last year, following two years where it was just above half. The government’s net debt will jump from £905.3bn in 2010-11 to £1.515 trillion by 2016-17, a massive increase.
Fitch’s move came just 24 hours after the chancellor had announced plans for 100-year gilts, in an attempt to lock in the UK’s present unsustainably low cost of government borrowing. From the Treasury’s narrow perspective, such a move may make sense – yields would be artificially low thanks to quantitative easing, slightly easing the burden on taxpayers – but it reflects misplaced priorities. The government should be obsessed with liberating the economy to boost growth (and cut our scandalously high unemployment) and with finding more savings in the public sector to cut the deficit faster. It should not be announcing with great fanfare fancy debt schemes. It should be incentivising the creation of more wealth, not endlessly seeking ways of taxing existing wealth.
There were other contradictions. The government hates interest-only mortgages – but it thinks 100-year gilts are fine. It rightly argues that large deficits are morally wrong because they lead to our children having to pay for our profligacy. Yet it proposes a gilt which will be repaid by our grand-children and our great grand-children. No wonder the public is confused.
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