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”
Newsbot9
No, they are not. There are examples of cuts not being sufficient to block recovery. But not “austerity”, which by design keeps being ratcheted up every time growth threatens.
LB
http://www.ons.gov.uk/ons/dcp171766_263808.pdf
Bottom of page 4, for starters. Currently that over 5,300 bn.
Another 1,100 bn for borrowing – check out at the http://www.dmo.gov.uk/ (debt management office – just the borrowing bit)
PFI on top.
Guarantees, you can ignore the banks unless you have evidence they are trading whilst insolvent.
However, Nuclear decommissioning was paid for up front, that’s also a liability.
Then you have the Post Office pension fund. Guarantees for BT pension fund etc.we know how much of it we can put against say investments, payments
I agree. Now what investments does the government have for its debts?
What assets can be sold to pay the debts?
What assets generate income in excess of the cost, so that the profits can be used to pay the debt?
so logically it can be repaid although it will take a long term plan of say 30 years.
A logical falacy. No doubt all bankrupts built up their debt over time, so there is no need to allow them to go bankrupt because they can repay their debt over time. Hmmm, quite easy to spot the flaw there.
No, what you need to do is add up all the debts and present value them. Then you can work out if your income and necessary spending means you can pay the debts off.
blarg1987
So your figures are wrong as its 4.7 not 5.3?
How can nuclear decommisioning be a liability you just said it has already been paid for :s.
Now BT pension fund is self covering, so we know that we do not have to pay for that one (can write that one off).
Your logic is heavily flawed as if I am wrong then no one would have a house as they are technically bankrupt are they not as the house is more then their salary as you are say9ng goverment debt is more then GDP so as I said it liek a mortgage can be repayed it will take a long term plan like any mortgage.
Add to that I think you will find the unfunded obligation of the state pension etc is based on the assumption we all retire tommorrow and claim it, would be like saying all insurence companies are broke which by your logic they are as if everyone claimed tomorrow for the full value they could not cover it.
LB
No, They are correct.
The debt figure in the ONS report is 5,010 bn. However its two years out of date. You need to increase that at 2.5%, for the triple lock, and that ignores any growth due to new contributions.
The assets are just IOUs from the state to the state. So you mustn’t double count. The asset reported is just part of the borrowing debt.
“Now BT pension fund is self covering” Nope. The BT pension fund should be fully funded. It isn’t. It has a large black hole that’s insured by the state. The expected loss should be on the books.
“Your logic is heavily flawed as if I am wrong then no one would have a house as they are technically bankrupt ”
Not at all. If I put 20% down on a house, I’ve two entries in the balance sheet.
1. The asset of the house.
2. The liability of the loan.
On day one, I’m up 20%, because of the deposit.
So 7,000 bn of debts for the government. Where are the money generating assets, and what does it cost to keep them generating money?
“assumption we all retire tommorrow and claim it,”. That’s your assumption, not mine.
The approach I’ve used is to take the present value, its what the ONS have done. The actual payouts will be far higher, but paid out over time. However, the pensions debt look like a 5,300 bn borrowing.
The way the ONS have valued the liabilities if you read around their website is as follows.
FIrst you get the accrued rights from the DWP. Age, number of years entitlement, and sex of the people who have paid NI.
Then get their life expectancy. Unlike your assumption of they must never die and all be paid for every (the full value claim), you add up the estimate of the number surviving to claim, by the percentage they have already paid for.
So just as an example for one year. Consider this.
Lets say we have 10,000 40 years old males, who each have earned 15 years out of 30 for a state pension.
ignoring the triple lock, but not inflation
Lets say, 9,500 survive until 65, their retirement age. We therefore expect to pay out,
15 / 30 x 10,000 * .95 for their 65 th year.
If 9,400 survive until 66, then that is another
15 / 30 * 10,000 * .94
….
We do this and add up. That’s what we have to pay out, assuming no triple lock. It’s all in terms of today’s value of money. For the triple lock, its the max of wage inflation, inflation and 2.5%. A derivative . So in practice the 2,500 should be increased at 0.5% (2.5% – Inflation target). That’s the lower bound. The ONS assume a lower growth, wrongly in my opinion.
For existing pensioners, you do the same. Except their life expectancy will be lower.
End result, 5,300 bn minimum.
All standard actuarial maths, and standard accounting practice. All ignored by the government.
Very simple reason. They won’t pay, because they cant’. It’s theft on a massive scale.
blarg1987
So why the ONS figures quote 4.7?
And correction you are 80% down on the loan, as you still can not repay all the money on the mortgage straight away so therefor you are broke.
The state owns assetts so it is not double counting, which is different to what you are saying as who owns the asset then if the goverment does not, you saying that our nuclear submarines are owned by BAE?
How do you know BT’e expected losses ar enot on the books and add to that all pension funds public and private are in defualt due to the financial markets and have admitted they will be solvent in several years. Add to that BT is topping up its pension so its debt is reducing.
Add to that National insurence is deducted from 16 not 25 etc.