Three years of economic vandalism that have left the UK open to this triple-A debacle


Last night leading credit ratings agency Moody’s downgraded the UK economy from AAA to Aa1.

moody'sThe reasons could not have been more clear; the coalition’s ‘significant policy commitment to austerity‘ was a ‘drag‘ on the economy.

Moody’s managing director Bart Oosterveld added that:

“There is a risk, given the pace of deficit and debt reduction, that the government may not be able to reverse the debt-to-GDP trajectory before the next economic downturn happens.”

For the last 3 years the UK has been very lucky, with the financial markets, the Euro crisis and the US political instability all boosting the perception that the UK is the  least ‘ugly’ country in Europe for investors.

Being a large economy with its own independent bank  made the UK a safe haven compared to the Eurozone in particular. The great arrogance was this government’s belief that it was the government’s austerity policy that was producing this honeymoon period with the markets.

It wasn’t, and now we will see how wrong they were.

Almost a year ago, writing here, I contrasted the actions of the US government who, through stimulus and investment, had produced “a tangible bridge back from the abyss allowing the private sector to motor back to strong growth”.

At the same time the UK had its “bridge kicked away by an ideologically-driven assault on government by the Conservative-led coalition just when it was needed most”.

The last three years were an opportunity for the UK government to step up to the plate and help businesses. It chose not to do that.

Let us compare GDP growth from 2010 to 2012 in the UK  with that of other countries. Sweden, another modern economy with a similar relationship to Europe? 11.6% growth; The embattled politically-infighting US? 6.9%; What about Germany? Stuck in the middle of the Euro crisis? 7.6%. And the UK? 2.5%.

Growth 2The mismanagement of the UK economy, driven by an ahistorical economic philosophy – try to name another time in modern history when an austerity-driven government has brought an economy out of recession – will in time ensure that this administration is seen as the most economically incompetent UK government in modern times.

For now, we can only note the missed opportunity of the past three years.

So what will the future bring?

Usually there would be a run on government bonds, but with the flood of cash to bonds from Quantitative Easing (QE), this is unlikely to happen. The currency markets are where the action is and the pound will continue, as it already has, to fall.

The real effect is that the UK’s hands are now economically tied.

Was it by chance that three days ago the Bank of England minutes showed that Sir Melvyn King was out-voted on expanding QE further: was his vote a warning? The Bank of England will not dare now push back on QE.

The great fear is inflation accompanying flat growth and again we have become powerless: would the Bank of England be brave enough to raise interest rates to combat inflation when the economy is flat-lining?

This is perhaps the saddest fact of all; we had 3 years to repair the house, fix the walls and stop the roof leaking. Instead we were busy ripping up the floorboards and tearing the plaster away.

What this government’s economic vandalism has left us with is a house that is unprotected against any future economic storm.

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  • Ramdev

    Vandalism that goes back more than 30 years, maybe longer.
    It really started when Maggie shook hands with Reagan and came back and closed all the coal based power to favor the oil industry.
    That was the same time the stupid green hype began…….

  • http://twitter.com/danielelton Daniel Elton

    There are examples of countries that used austerity to get out of recession, but they only show how dumb the coalition has been. Canada and Sweden managed in the 90s, but only because they managed to ‘outsourced their stimulus’ to large booming markets on their doorstep. But with Europe in trouble, it was never going to work for the UK now.

  • HD2

    Moody’s make it clear that the Coalition’s ‘austerity’ measures have been too shallow, too slow.

    Balls has claimed all along they were ‘too fast, too deep’, so just how far down will Moody’s degrade the UK when/if Balls looks remotely like getting into 11 Downing St?

    Your highly selective quotes deliberately misrepresent the Moody’s findings – which have UPGRADED the UK’s forward outlook from ‘negative’ to ‘neutral’.

    FWIW, I’ve been saying for 3+ years that the UK’s economy, like that of every Western nation, will not see significant growth (over population rises) for the next 20 years, as our real wages align with those in Asia.

    I now see that period extending still further – perhaps for 50 years – unless and until the entire post WW2 construct of the Welfare State as we have in the UK is removed: no NHS; no national Soc Ser; no ‘free’ schools; no Child Benefit; no Family Tax Credits or Housing Benefit once you’re working.

    You read it here first – Moody’s took 3-4 years to catch up wit me (Mervyn King even longer) so make your own plans for your future, based on ‘family first’ as the rest of us are not going to help.

    Laws said he thought the maximum sustainable Govt spending was 33% of GDP (our is close to 50%) and, since he’s a Socialist, we can reasonably deduce that the true maximum is between 20 and 25%. That’s HALF what we spend today – so get used to it.

    Oh – and since the UK economy is currently getting an annual stimulus of over £120 billion (the biggest ever), your readers should also realise that that figure has to be (almost) reversed before fiscal sanity is restored – that’s a £150-£170 billion pa REDUCTION in Govt spending from current levels, before we start to reduce the national debt. We’ll then need to maintain that (minimal) level of spending for 30-50 years to clear that Debt – the vast, vast majority of it created since 2005.

    Your children will be poorer than you are, and your grandchildren poorer still. All because of Socialism, Attlee, Wilson and Brown: and 50 years of the UK spineless putting Rhodes before roads. Squandering taxes on benefits and not spending them on infrastructure. That’s the tragedy of the post-WW2 period in the UK.

    And we all voted for it – the baby-boomers spent the nation’s wealth – for at least 2 generations to come.

  • http://twitter.com/anthonybmasters Anthony Masters

    I am unclear as to where your quote: ‘significant commitment to austerity’ comes from. The word ‘austerity’ does not appear in Moody’s announcement, which you have linked to. In fact, under the heading ‘What could move the rating up/down’, Moody’s Investor Services state:

    As reflected by the stable rating outlook, Moody’s does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK’s debt burden during the multi-year fiscal consolidation programme. Moody’s could also downgrade the UK’s government debt rating further in the event of an additional material deterioration in the country’s economic prospects or reduced political commitment to fiscal consolidation.
    Conversely, Moody’s would consider changing the outlook on the UK’s rating to positive, and ultimately upgrading the rating back to Aaa, in the event of much more rapid economic growth and debt-to-GDP reduction than Moody’s is currently anticipating.

    This statement makes abundantly clear that Moody’s perceives that the reduction in the debt-to-GDP is not going to happen fast enough.

  • Ranjit Sidhu

    Hi All,

    Firstly thank you for your comments:

    Daniel Elton: good point well made, completely agree.

    HD2: The core of the article is the change in growth rates for GDP, the lack of growth is the killer for the UK.

    Anthony Masters: see http://www.ft.com/cms/s/0/ad9992b4-7d38-11e2-8bd7-00144feabdc0.html#axzz2Lhdx0zvY

    Again, consider the statement “debt to GDP ratio”, there are two parts to that equation, my consideration is that this economic absurdity of the last few years has focused on the reduction of the former part of the statement with complete lack of understanding of the impact on later part.

    Again thanks for the comments

  • Mr. Reasonable

    Erm, I think you’ve come to the wrong place, Mr. HD2. On this side of the road, we tend to believe that we’ve had 30 years of neoliberalism (including Blair, who is, after all, a Tory) and it’s been a bit rubbish, actually.

  • LB

    Look its very simple.

    You’ve been running a Ponzi scam.

    The ONS put the off the book debts for pensions at 5,300 bn.

    That’s on top of the 1,100 bn debts.

    Now Moodies don’t give a shit about the pensions. They just care about the borrowing.

    So lets ask the obvious question. 14 years of Labour investment, investment and more investment.

    Must produce either savings (spending cuts) or something that generates an income. It’s doesn’t. It’s screwed.

    Cameron and co are just carrying on the scam. Bernie Maddoff accounting to hide it. Not even banks can get away with that fraud.

  • LB

    There is no austerity. Look at spending, up each year.

  • LB

    “Debt to GDP ratio”,

    So why omit the pensions debts?

    Why use GDP, and not use taxation?

    Ah yes, it makes it look affordable.

  • LB

    It goes back farther. It goes back to the first group who didn’t implement Beveridge, and decided to run a Ponzi instead

  • LB

    Well, Canada did it with a bonkers US on its border.

    The UK can do the same, with a bonkers EU on its borders.

    Imagine the state of the UK, with no debts, and the EU going bonkers on debts.

  • Seb

    You’ve completely misunderstood how ratings work.

    If you downgrade the rating, of course it makes sense to change the forward outlook from negative to neutral. It was negative before because there was an expectation of a downgrade. Now that that downgrade has happened, there is no longer the expectation of it. They expect it to remain at the new, downgraded rating for the forseeable future.

  • blarg1987

    You sure their is that much debt? How much is guarentees etc? Therefore yues it is right to assume we may have to pay all of it, but it is wrong to say we have to pay all of it untill we know how much of it we can put against say investments, payments etc.

    Drom that we can work out the true debt and you did say that this debt has been going on for over 30 years so logically it can be repaid although it will take a long term plan of say 30 years.

  • mike.g@mikeconomics.net

    Credit rating agencies have lost their credibility a long time ago (Enron, Lehman, Greece…). Vince Cable shrugs off credit downgrade. And he is right! Let me take advantage to link you to my thoughts about that and more in my book (see http://www.mikeconomics.net).

  • Newsbot9

    Except, of course, that you’re mis-reading the commentary by Moodies. Austerity has increased borrowing, not reduced it, because it’s unmitigated fiscal contraction.

    Of course you’ve been fighting against growth, trying to cause wages to drop to Asian levels (while, of course, you rake off cash from living costs not declining nearly as fast, if at all). Of course you want us to get used to killing off the poor, to having a shrinking and failing economy. You’ve bet on it with your shares, after all! Keep claiming that your pork-barrel spending is a “stimulus”, when it’s counter-growth.

    You are indeed GLORYING in trying to make people’s kids poorer and poorer. This is your aim, your goal – to suck up all the wealth. Keep claiming that it’s evil to have the poor, disabled and pensioners alive. Keep claiming that the post-WWII growth was a mistake. You’re…a Tory.

  • Newsbot9

    You mean a UK with a population of perhaps 15 million, occupied, after the nuclear weapons exchange?

  • Newsbot9

    No, your ponzi scam is yours, nobody else’s.
    Keep on claiming your fraud’s bigger than Maddoff’s!

  • Newsbot9

    Yes, thanks for admitting that you’ve been a criminal for a very long time.

  • Newsbot9

    Keep claiming that your pork-barrel spending and the cost of slashing cost-saving measures is magically Keynesian. Keep trying to call for ending pensions, the NHS and schooling, as an initial step!

  • Newsbot9

    Ranjit; That article is paywalled.

  • Newsbot9

    No, they are not. There are examples of cuts not being sufficient to block recovery. But not “austerity”, which by design keeps being ratcheted up every time growth threatens.

  • LB

    http://www.ons.gov.uk/ons/dcp171766_263808.pdf

    Bottom of page 4, for starters. Currently that over 5,300 bn.

    Another 1,100 bn for borrowing – check out at the http://www.dmo.gov.uk/ (debt management office – just the borrowing bit)

    PFI on top.

    Guarantees, you can ignore the banks unless you have evidence they are trading whilst insolvent.

    However, Nuclear decommissioning was paid for up front, that’s also a liability.

    Then you have the Post Office pension fund. Guarantees for BT pension fund etc.we know how much of it we can put against say investments, payments

    I agree. Now what investments does the government have for its debts?

    What assets can be sold to pay the debts?

    What assets generate income in excess of the cost, so that the profits can be used to pay the debt?

    so logically it can be repaid although it will take a long term plan of say 30 years.

    A logical falacy. No doubt all bankrupts built up their debt over time, so there is no need to allow them to go bankrupt because they can repay their debt over time. Hmmm, quite easy to spot the flaw there.

    No, what you need to do is add up all the debts and present value them. Then you can work out if your income and necessary spending means you can pay the debts off.

  • blarg1987

    So your figures are wrong as its 4.7 not 5.3?

    How can nuclear decommisioning be a liability you just said it has already been paid for :s.

    Now BT pension fund is self covering, so we know that we do not have to pay for that one (can write that one off).

    Your logic is heavily flawed as if I am wrong then no one would have a house as they are technically bankrupt are they not as the house is more then their salary as you are say9ng goverment debt is more then GDP so as I said it liek a mortgage can be repayed it will take a long term plan like any mortgage.

    Add to that I think you will find the unfunded obligation of the state pension etc is based on the assumption we all retire tommorrow and claim it, would be like saying all insurence companies are broke which by your logic they are as if everyone claimed tomorrow for the full value they could not cover it.

  • LB

    No, They are correct.

    The debt figure in the ONS report is 5,010 bn. However its two years out of date. You need to increase that at 2.5%, for the triple lock, and that ignores any growth due to new contributions.

    The assets are just IOUs from the state to the state. So you mustn’t double count. The asset reported is just part of the borrowing debt.

    “Now BT pension fund is self covering” Nope. The BT pension fund should be fully funded. It isn’t. It has a large black hole that’s insured by the state. The expected loss should be on the books.

    “Your logic is heavily flawed as if I am wrong then no one would have a house as they are technically bankrupt ”

    Not at all. If I put 20% down on a house, I’ve two entries in the balance sheet.

    1. The asset of the house.

    2. The liability of the loan.

    On day one, I’m up 20%, because of the deposit.

    So 7,000 bn of debts for the government. Where are the money generating assets, and what does it cost to keep them generating money?

    “assumption we all retire tommorrow and claim it,”. That’s your assumption, not mine.

    The approach I’ve used is to take the present value, its what the ONS have done. The actual payouts will be far higher, but paid out over time. However, the pensions debt look like a 5,300 bn borrowing.

    The way the ONS have valued the liabilities if you read around their website is as follows.

    FIrst you get the accrued rights from the DWP. Age, number of years entitlement, and sex of the people who have paid NI.

    Then get their life expectancy. Unlike your assumption of they must never die and all be paid for every (the full value claim), you add up the estimate of the number surviving to claim, by the percentage they have already paid for.

    So just as an example for one year. Consider this.

    Lets say we have 10,000 40 years old males, who each have earned 15 years out of 30 for a state pension.

    ignoring the triple lock, but not inflation

    Lets say, 9,500 survive until 65, their retirement age. We therefore expect to pay out,

    15 / 30 x 10,000 * .95 for their 65 th year.

    If 9,400 survive until 66, then that is another

    15 / 30 * 10,000 * .94

    ….

    We do this and add up. That’s what we have to pay out, assuming no triple lock. It’s all in terms of today’s value of money. For the triple lock, its the max of wage inflation, inflation and 2.5%. A derivative . So in practice the 2,500 should be increased at 0.5% (2.5% – Inflation target). That’s the lower bound. The ONS assume a lower growth, wrongly in my opinion.

    For existing pensioners, you do the same. Except their life expectancy will be lower.

    End result, 5,300 bn minimum.

    All standard actuarial maths, and standard accounting practice. All ignored by the government.

    Very simple reason. They won’t pay, because they cant’. It’s theft on a massive scale.

  • blarg1987

    So why the ONS figures quote 4.7?

    And correction you are 80% down on the loan, as you still can not repay all the money on the mortgage straight away so therefor you are broke.

    The state owns assetts so it is not double counting, which is different to what you are saying as who owns the asset then if the goverment does not, you saying that our nuclear submarines are owned by BAE?

    How do you know BT’e expected losses ar enot on the books and add to that all pension funds public and private are in defualt due to the financial markets and have admitted they will be solvent in several years. Add to that BT is topping up its pension so its debt is reducing.

    Add to that National insurence is deducted from 16 not 25 etc.

  • LB

    Because the ONS is offsetting the debts against a small holding of Gilts.

    You can’t make an asset by writing an IOU to yourself.

    On the mortgage you are not broke. You have a contract with the lender, and the lender cannot call the loan, making you bankrupt, so long as you meet the cashflow payments.

    To be bankrupt, there are two conditions.

    1. Assets < liabilities, and no foreseeable chance of a recovery
    2. Inability to meet cashflow requirements.

    Invariably, its the second that sends people and organisations to the wall. However, you can meet 1, but fail 2, and hence you still go to the wall.

    So which assets does it own? Now look at the bankruptcy tests.

    Nuclear submarines. Assets yes. Can you sell them to generate money to pay pensions? To whom if the answer is yes. They are liabilities, spending. Same with hospitals. To whom are you going to sell. What then for the NHS? Rent them back. Just spending at the end.

    BT's pension funds are reported on a mark to market basis. They can't make the numbers up, and they have to report them. Assets are known on a daily basis, and valued daily. Liabilities are bit more woolly, but again there are standard accounting practices to report them. So just as a slight matter of accuracy, the debts aren't being reduced, they are going up. It's that they are increasing assets by paying more in. However, the difference is still negative. Assets are less than liabilities, and the state has guaranteed that for no premiums.

    NI from 16? Well 18 now. Makes the deal even worse. Contribute for more than 40 years and you would have got an even bigger return in the last few years, but less to spend it over so an even bigger income.

    e.g For anyone who says that the FTSE is risky needs to compare the FTSE with NI going into that with what the state gives for its NI. You would be horrified.

    At the end of the day, the government gives lip service and says, yes we will use GAAP. Then for the big debts says, no we won't. There's less than 50% chance of paying the pensions so we won't put it on the books.

    So you and I are being defrauded. You might be able to cope. I might be able to cope. But look at the news today about the lack of savings. Most people are going to be absolutely screwed. That's immoral and evil

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