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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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.