Three reasons why Britain’s credit downgrade is no mere technicality

A MAJOR irritation for anyone attempting to engage in an informed public discussion of economic policy is the media’s desire to latch onto any piece of news which makes a snappy headline. No one pretends that the majority of the public knows – or much cares – about how the ratings agencies work, but the catchy word “downgrade” is too good for news outlets to resist. The same has been true of “fears of a triple-dip recession” and the tendency to treat any official growth figures just a tad above zero per cent as colossally and crucially different from those just microscopically on the wrong side of that line. In truth, of course, all anyone can really say is that the economy is broadly flatlining.

So, does the decision of Moody’s to strip the UK of its AAA rating amount to much more than a minor media flurry and an extra notch of pressure on the increasingly beleaguered chancellor of the exchequer? I’d argue that it does. The downgrade by one of the agencies to AA1 isn’t a game changer, but it still matters.

Firstly, George Osborne told us that the retention of the triple A rating was one of the key measurements of his credibility. This may have been a daft mast for him to nail his flag to, but in so far as a chancellor can pick his own criteria for success, he fully deserves to face stiff cross-examination and criticism when he fails to meet them. The chancellor is judged not just on his policies or even on his supposed over-arching economic strategy, but also on his day-to-day credibility. Anything which chips away at that should not be casually dismissed. That the Moody’s downgrade will further fuel the determination of those on the government benches who wish to see Osborne replaced isn’t just a matter of inside-the-Westminster-beltway intrigue, it erodes the chancellor’s ability to successfully undertake his duties.

Secondly, even if Vince Cable, the business secretary, is right in dismissing the Moody’s decision as “merely symbolic”, this rather asks the question as to what exactly the downgrade symbolises. If it symbolises the fact the coalition is badly losing its way in pursuing a meaningful deficit reduction plan and has presided over an economy failing to get anywhere remotely close to its growth forecasts, then it symbolises something very important indeed. In short, it shows that the coalition’s economic strategy is unravelling badly.

The government’s initial plan was to see the national debt as a proportion of GDP falling by the time of the next general election. That has already been kicked far into the long and distant grass. Don’t expect it to happen until the middle of the next Parliament at the very earliest. Instead, the coalition will actually add around £600bn to the national debt over their term of office – around about £10,000 for every man, woman and child in the United Kingdom. Overspending on this scale is extraordinary, no chancellor will ever have added so much to the national debt so quickly. It is hard to honestly describe such a policy as taking “tough measures” as Osborne insists on doing in press interviews.

This leads us to the third reason why the downgrade matters. It has already been the trigger for a public debate about whether the government should “change course”. Given the course the government has set is to spend hundreds of billions pounds it doesn’t actually have and to fail to embrace any genuinely radical supply side reform to help kickstart the economy, I, for one, would be delighted to see the government change course.

Sadly, the debate is yet to be framed as being between those who believe that the massive Keynesian fiscal stimulus of recent years has been a failure and those who wish it to continue. Rather, in the House of Commons at least, it is between those who think that this administration should cap overspending by the state to about £600bn and those who think that if we only increased this level of fiscal incontinence to £700bn or £800bn, things would be sure to improve in short order – their response to the failure of massive government spending being that we need even more of it.

Whatever Osborne’s short term political future, he risks his legacy being that of a man who talked of making savings and balancing the books but became just another in the long line of politicians to prove that an old-style, “spend now, worry later” Keynesian fiscal stimulus simply doesn’t work.

Mark Littlewood is director-general of the Institute of Economic Affairs.

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April 22, 2014, 2:25pm