Is Moody’s move a vindication for Osborne?
It was always a hostage to fortune. For the best part of a year the chancellor has been making speeches boasting about how Standard & Poor’s removed Britain from negative outlook for its AAA sovereign rating.
During the autumn statement speech just ten weeks ago he even described how Britain was the only major country that had seen its “credit rating improve”.
So by his own measure we are justified to describe Britain’s credit rating as worsened or deteriorating even if it hasn’t been cut. It’s in the relegation zone to be cut. And 30 per cent of the time negative outlook leads to a downgrade.
So how does the chancellor manage the intellectual contortion that coming off negative outlook and then going back on negative outlook are both vindications of his macroeconomic policy?
If you look at Moody’s statement it is true that it mentions a “reduced political commitment to fiscal consolidation, including discretionary loosening ” as one factor that could lead to an actual downgrade. That is a sub clause in a paragraph of reasons, not the main message of Moody’s assessment:
“What could move the the rating down?
“The UK’s AAA rating could potentially be downgraded if Moody’s were to conclude that debt metrics are unlikely to stabilise within the next 3-4 years, with the deficit, the overall debt burden and/or debt-financing costs continuing on a rising trend. This could happen in one of three scenarios, all of which would imply lower economic and/or government financial strength:
(1) a combination of significantly slower economic growth over a multi-year time horizon – perhaps due to persistent private-sector deleveraging and very weak growth in Europe – and reduced political commitment to fiscal consolidation, including discretionary fiscal loosening or a failure to respond to a deteriorating fiscal outlook;
(2) a sharp rise in debt-refinancing costs, possibly associated with an inflation shock or a deterioration in market confidence over a sustained period;
or (3) renewed problems in the banking sector that force a resumption of official support programmes and spill over into the real economy, indirectly causing lower growth and larger budget deficits.
Conversely, the rating outlook could return to stable if the combination of less adverse macroeconomic conditions, progress towards containing the euro area crisis and deficit reduction measures were to ease medium-term uncertainties with regards to the country’s debt trajectory.”
Clearly the chancellor believes that this is a ringing endorsement for his macro policy and aimed at Ed Balls “deficit denialism”. Perhaps there’s a third way. It’s clearly not a licence for a Keynesian fiscal stimulus. But it’s not a ringing endorsement of an economy with more debt, no growth (0.3 per cent since the spending review, less in the SIX QUARTERS of his chancellorship than in the single quarter that preceded it,) and high inflation.
Even within its own framework of cutting the deficit, it has already conceded that the original balance between cutting investment spending and cutting current spending was slightly wrong (and this was changed last November).
Manichean world of Osborne fiscal masochism
No, I think the true lesson of the Moody’s change of view is that the Manichean world of Osborne fiscal masochism versus Balls deficit denialism is nonsense and a particularly unhelpful lens on UK economic prospects right now. For the government it is limiting room for manoeuvre in a state of the world that is entirely different to what it expected at the beginning of its deficit programme.
The British Chambers of Commerce today, post-Moody’s, argued that the verdict was mainly about lack of growth, and that there is room for a £3-5bn fiscal stimulus at the budget.
The real debate might be about whether or not there should be more cuts and tax rises if the economy weakens. Moody’s is pretty clear that one of the main drivers behind its action was that UK national debt will still be rising in 2015. The chancellor won’t be able to pull off his November trick of again stretching out UK austerity into the next parliament, should growth continue to disappoint, and keep the AAA. The fundamental issue: should the AAA be the be all and end all?
The bigger picture here: why on earth are credit ratings elevated to this hallowed status? Moody’s pulled off the spectacular intellectual feat of rating the Bank of England (four centuries of history, ability instantly to create money at will) as a lesser credit than the European Financial Stability Facility (about a year old, political structure subject to funding from Germany etc for € rescue, employs 15 people in Luxembourg).
The answer is that it has been an important piece of marketing for George Osborne, to communicate a tangible benefit from unpopular austerity
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