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.
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30 Responses to “Osborne now faces credit rating crisis”
Anne Brunton
RT @leftfootfwd: Osborne now faces credit rating crisis: http://bit.ly/h1pUAJ writes Ben Fox
Daniel Pitt
Osborne now faces credit crisis http://bit.ly/h1pUAJ #ConDemNation
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.
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.
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.