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”
Gay-Jeanne Oliver
RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox
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.
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
Former GONW Branch
RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox
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.