Osborne hoisted with his own petard

With Britain's credit rating on negative outlook, the Chancellor's reputation is on the line.

So much for George Osborne's claim that the UK is a "safe haven". Moody's decision to place Britain's AAA credit rating on "negative" watch explodes the Chancellor's delusions. There is now roughly a 30 per cent chance that the UK's credit rating will be downgraded in the next 18 months. Given that Osborne chose to make our credit rating the ultimate metric of economic stability, this is, to put it mildly, politically awkward for him.

Just ten weeks ago, in his autumn statement, while announcing that the UK would borrow £158bn more than forecast a year ago, Osborne boasted that "we are the only major western country which has had its credit rating improve" (i.e. come off negative outlook). He said:

Last April, the absence of a credible deficit plan meant our country's credit rating was on negative outlook and our market interest rates were higher than Italy's.

By his own logic, therefore, his deficit plan is no longer credible. When Britain was first put on negative outlook by Standard & Poor's (S&P) in May 2009, Osborne declared:

It's now clear that Britain's economic reputation is on the line at the next general election, another reason for bringing the date forward and having that election now ... For the first time since these ratings began in 1978, the outlook for British debt has been downgraded from stable to negative.

And when the UK was taken off negative watch by S&P in October 2010, he boasted of "a big vote of confidence in the UK, and a vote of confidence in the coalition government's economic policies".

The Chancellor has been hoisted with his own petard.

The economic consequences of a downgrade need not be disastrous. France and the US have seen little rise in their borrowing costs since losing their AAA ratings. Indeed, France has just held its most successful bond auction for some time. But politically speaking, this could not be more uncomfortable for Osborne.

Yet if Moody's decision is awkward for the coalition, it offers scant comfort for Labour. Although the agency echoes Ed Balls's concerns about the lack of growth in the UK economy (it refers to "the materially weaker growth prospects over the next few years"), it does not accuse Osborne of going "too far, too fast". Indeed, it praises the government's "commitment to restoring a sustainable debt position". If anything, its complaint is that the Chancellor has been too timid.

As for the fiscal stimulus demanded by Labour, Moody's is clear that, in its view, this is not an option. Under the sub-head "What could move the rating down?", it cites "reduced political commitment to fiscal consolidation, including discretionary fiscal loosening". In other words, were Labour in power, the UK would almost certainly have already lost its AAA rating.

But then why we should listen to Moody's, the agency that gave AIG an AAA rating just a month before it collapsed? The answer is simple: we shouldn't. But this doesn't alter the fact that Osborne did. For political purposes, he used Britain's credit rating as a stick to beat Labour with. He can hardly complain if others now use this move against him. The hunter has become the hunted.

George Eaton is political editor of the New Statesman.

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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