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”
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
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.
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.
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.
Mr. Sensible
Osborne’s got a bitof a problem…