Osborne now faces credit rating crisis

Ben Fox reports on Mr Osborne's dangerous economic policies that could drive us into a credit rating crisis.

Does anybody remember the rhetoric of Mr Cameron and Mr Osborne in the months before last year’s election? Britain was in danger of losing its coveted AAA credit rating under Labour. All this was said despite the fact that, in February 2010, two of the three ratings agencies, Moody’s and Fitch, were both on record as saying Britain’s economic outlook was stable and there was no danger of a downgrade.

This, remember, was when it was assumed Britain’s budget deficit for 2009 had been £178 billion. It later turned out the Treasury had massively overestimated the deficit which was, in fact, £150bn.

This week, Mr Osborne announced in his budget speech the budget deficit for 2010 would be £146.5bn – a figure that would have been lower had the economy not contracted by 0.6% in Q4 2010 having previously grown by 1.7% in the previous two quarters as Labour’s stimulus measures took effect.

He also revised down the Treasury’s growth forecast for the coming two years, although at 1.7% in 2011 and 2.5% in 2012, the predictions are still highly optimistic. This optimism is clearly evident to the markets.

The following day Moody’s warned that the AAA rating was at risk if Mr Osborne’s predictions were not met. As Daily Mail blowhard Richard Littlejohn might say, “you couldn’t make it up”.

The irony is that Mr Osborne’s refusal to even countenance an alternative to his ‘Plan A’ of aggressive fiscal consolidation, which has already led to weaker economic growth and higher unemployment, could lead to Britain losing its AAA rating. As Larry Elliott has pointed out, the likes of Ireland, Portugal and Spain made massive austerity programmes yet still had their credit rating cut. Britain could be next.

The government’s growth estimates are based on a massive expansion in the private sector. Yet consumer spending fell by 0.8 per cent in February as people feel the pinch from the VAT rise and rising inflation that is now double the rate of wage rises.

High and rising inflation risks derailing Mr Osborne’s ‘Plan A’. It seems as though the bad old days of high inflation have come back. With the Retail Price Index hitting 5.5 per cent in February, and likely to rise further, the £630 increase to the personal allowance will be entirely offset by rising utility bills, fuel prices, and food and clothing costs.

Although the spike in oil prices (now being accentuated by the war in Libya) is not Mr Osborne’s fault, the effect of the VAT rise is. Most people in Britain – particularly those on medium and low incomes – will be much poorer. Their reduced spending power and the fact that consumer confidence is at its lowest level since October 2008, at the height of the financial crisis, makes it very unlikely that consumption will drive growth.

In what is likely to be a portent for the future, the Organisation for Economic Co-operation and Development (OECD) has just revised its forecasts for 2011 growth in the UK down to 1.5 per cent. Consumer spending is getting weaker and, with British inflation levels almost double the 2.8 per cent level in the euro-area, it will inevitably be weaker than the rest of the EU.

In the context of this, alongside rising unemployment, Mr Osborne’s implacable commitment to cuts will lead to a very tough and painful year. It will get even more painful, especially for Mr Osborne, if Britain’s credit rating is cut because of his arrogance and complacency.

30 Responses to “Osborne now faces credit rating crisis”

  1. Philip Painter

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  2. Brummie Protestor

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  3. Graham Galloway

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  4. Phil Randal

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  5. Dinner

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  6. Gay-Jeanne Oliver

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  7. Anna

    Hilarious!!!!

    The credit rating agency’s worry is the deficit, they are concerned by growth only so far as it affects the cuts Osborne is able to make.

  8. Credit Rating Repair

    Osborne now faces credit rating crisis: Britain was in danger of losing its coveted AAA credit rating under Labo… http://bit.ly/hAzKqI

  9. Former GONW Branch

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  10. Politicalhackuk

    Nothing like a good deficit fetishist, is there? The deficit was caused by a collapse in tax revenue from the financial sector, not by spending on services, schools or hospitals. While some cuts are required, the main way of closing the deficit gap is by promoting growth. Anything that depresses the economy further poses a threat to the biggest driver of deficit reduction. The Tory government has absolutely no plans to support growth and that is the biggest threat to our credit rating. We’ve seen how well a programme focussed on cuts has worked – look across the Irish Sea for an economy rendered a basket case by cut after cut. That’s our future unless Osborne bucks up his ideas.

  11. Duncan Todd

    So how does it feel to be credit blacklisted?
    RT @leftfootfwd: Osborne now faces credit rating crisis http://bit.ly/hYG9WJ

  12. anyleftiwonder

    Not funny .

  13. Hitchin England

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  14. BenM

    The Tories are economically incompetent.

    Official.

  15. 13eastie

    Readers must be wondering whether this piece is talking about the same rating agencies that LFF was ridiculing only a few days ago…

    http://www.leftfootforward.org/2011/03/the-importance-of-independent-global-credit-rating-agencies/

    @2 – Labour ran a deficit from 2002 when tax revenues were booming. Especially from the financial sector. Inconvenient for the deniers…

  16. Anne Brunton

    RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox

  17. Daniel Pitt

    Osborne now faces credit crisis http://bit.ly/h1pUAJ #ConDemNation

  18. Andy Billington

    Its news articles like this which has crippled consumer confidence in this country. There are many reasons for the economy being as it is. House prices rising to rip off levels during the 2000s to make the uk look like a rich country. They had to crash at some point naturally which was always going to take a kind lender down with them (northern rock for one) Also creating needless jobs in the public sector to lower unemployment but the saleries were being paid with public monies the country never had. TONY BLAIR crippled this country economically and the tories unfortunetely dont have an instant fix. It would take an arabs oil pot to sort this not a labour, tories, coalition or whatever government.

  19. Martyn A

    If one borrows one is hostage to the creditors. When I take a mortgage or a loan I effectively allow the government of the day to control me using interest rate and tax policy. The same is true at a national level. The only country that appears to be able to bend the rules is the US because it has a reserve currency (but only because there is no credible alternative). For us we are simply judged on our ability to pay. Any administration with the 200 billion debt the last labour government ran up has to tread carefully. The Emperor has no clothes (for labour supporters I mean we cannot pay our debt back). If the market comes to believe that this fact will manifest itself in default in the near term then we will find our borrowing costs climb and out insolvency will be plain to even the meanest intellect (that would be Ed Balls) and we will have the Irish situation (one Portugal will soon also experience).

    My children and there children will be dealing with the mess Gordon Brown created, he should be ashamed.

  20. graham hart

    Debt is an obsolete concept in our modern world.
    The nations should agree to stop financing investment using debt and print the money instead.
    Our infrastructure is decaying while we have capable people on the unemployment scrap heap all because we worship money.

  21. Martyn A

    To Graham Hart I would suggest a look at events prior to world war 2 notably the Weimar republic. Those who have not studied and learnt the mistakes from history are destined to repeat them. I for one am amazed the Germans did not have monumental hissy fit when it transpired that Ireland had indeed just been printing Euro’s

  22. Competent Economist

    The author seems a little confused about what the credit rating agencies are saying. They are certainly not saying the deficit is lower than expected but that they are concerned that it might not reduce as quickly as they would like and that Osborne needs to consider cutting deeper and faster. As Osborne has made clear he does not want to do that. He has also made clear that a consumption led recover will do no one any favours. We already know where that leads with massive and unsustainable consumer debt.

  23. Fred

    The current political parties have ruined our manufacturing base, fisheries and agriculture so lower spending means simply less foreign goods. The only difference is that Osborn and his ilk will get less VAT to support foreign wars, the EU and hopefully the Barnett formula.

  24. Shady

    Agree with 5 – plus, you talk about ‘Labour’s stimulus’ and then decry the pace of inflation as if the two are unrelated. Skip back over the last few years an see how many times the BoE missed the inflation target. That stimulus mainly served to hide the very real problems in the economy.

  25. Mr. Sensible

    Osborne’s got a bitof a problem…

  26. BenM

    @13eastie

    seeing as the right loves painting ratings agencies as a bit of a boogeyman constraining government economic policy it is marvellously ironic to see rightwing economic policy failing on its own terms!

  27. Nick

    What is it about Labour lovers who cannot connect their eyes and ears to their brain and then employ some logic. Brown’s management of the economy was a fiasco. Labour generated the problems we now face, not the Tories. Why do you wear blinkers and refuse to accept reality. I’d hate to live in you world.

  28. Osborne now faces credit rating crisis – Left Foot Forward | Preston News and Weather

    […] Osborne now faces credit rating crisisLeft Foot ForwardDoes anybody remember the rhetoric of Mr Cameron and Mr Osborne in the months before last year's election? Britain was in danger of losing its coveted AAA credit rating under Labour. All this was said despite the fact that, in February 2010, …Ireland, Portugal … Britain? George Osborne only has Plan AThe Guardian […]

  29. S

    And lest we forget the people who borrowed instead of saving, and the ones who inflate house prices at every opportunity and reject regulation at every opportunity. They are the middle classes.

    Well done. The bankers couldn’t have done it without you.

  30. Hach

    To Andy Billington. Hmm Labour created needless jobs in the public sector right. So I’m imagining the 25,000 jobs lost in the civil service under Labour and the reliance on overtime to clear backlogs of work that have been happening for the last few years.I think you’ve read (and believed) the Daily Fail sorry Mail far to often.

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