The blame for the downgrading of the UK's triple-A credit rating by Moody's can be laid squarely at the door of the government.
Last night leading credit ratings agency Moody’s downgraded the UK economy from AAA to Aa1.
The 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-
The 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.
26 Responses to “Three years of economic vandalism that have left the UK open to this triple-A debacle”
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…….
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.
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