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.
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