Why we should hope the UK loses its AAA rating

It would expose the myth that the market punishes higher borrowing.

As a drowning man clings to a life raft, so George Osborne clings to the UK's AAA credit rating as proof of his "credibility". When Standard & Poor's reaffirmed the UK's top rating last month, Osborne declared: "this is a reminder that despite the economic problems we face, the world has confidence that we are dealing with them".

But with the Chancellor now likely to break his golden debt rule, it's possible and even probable that at least one agency (Moody's and Fitch currently have the UK on "negative outlook") will remove our AAA rating in the near future. If Osborne is to be believed, this would be a disastrous blow to our economic credibility. But, as so often with the Chancellor, there's no evidence for this claim. The US, for instance, has seen no rise in its borrowing costs since losing its AAA rating a year ago today, indeed, its rates have fallen. All the evidence we have suggests that the market is prepared to lend to countries that can borrow in their own currencies, such as the US, the UK and Japan, and that enjoy the benefits of an independent monetary policy, regardless of their credit ratings or their debt levels (Japan's national debt is 211 per cent of GDP, while ours is 66 per cent, a reminder that we were never on the "brink of bankruptcy").

Now, as PoliticsHome points out, Danny Alexander has hinted that he knows as much. The Chief Secretary to the Treasury told the BBC:

The credit rating is not the be-all and end-all.

What matters is have we got the right policy mix for the country to get people back into work, to support economic growth, to deal with the huge problems in our public finances and the credit agencies reflect on those things and the ratings they give are a reflection of the credibility of that mix.

In fact, one could go further than Alexander and argue that the loss of our AAA rating would be a positive development. It would explode the myth that borrowing for growth (in the form of tax cuts and higher public spending) would lead to a bond market revolt and would strengthen the cause of those who argue that we shouldn't allow the agencies that rated Lehman Brothers as "safe", days before it filed for bankruptcy, to dictate our economic policy. It would also, of course, be a lethal blow to the political credibility of the current occupant of the Treasury. Osborne's deficit reduction plan was rooted in the need to preserve our AAA rating. If he fails in this task, why should voters trust him to do anything else?

Yet the loss of our AAA rating would finally liberate Osborne to pursue a plan that actually works. Once the belief that the market holds a veto on our borrowing levels is exposed as a myth, the Chancellor could finally stimulate growth through tax cuts and higher public spending. A growing economy could revive his reputation and that of his party. The path to redemption is open to Osborne. Unfortunately for the Tories, there is almost no chance of him taking it.

Chancellor George Osborne and Culture Secretary Jeremy Hunt watch the track cycling at the Olympics. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty
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Cabinet audit: what does the appointment of Liam Fox as International Trade Secretary mean for policy?

The political and policy-based implications of the new Secretary of State for International Trade.

Only Nixon, it is said, could have gone to China. Only a politician with the impeccable Commie-bashing credentials of the 37th President had the political capital necessary to strike a deal with the People’s Republic of China.

Theresa May’s great hope is that only Liam Fox, the newly-installed Secretary of State for International Trade, has the Euro-bashing credentials to break the news to the Brexiteers that a deal between a post-Leave United Kingdom and China might be somewhat harder to negotiate than Vote Leave suggested.

The biggest item on the agenda: striking a deal that allows Britain to stay in the single market. Elsewhere, Fox should use his political capital with the Conservative right to wait longer to sign deals than a Remainer would have to, to avoid the United Kingdom being caught in a series of bad deals. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.