Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Moody’s decision a blow to George Osborne

Chancellor has said that the coalition’s determination to tackle UK’s debts has kept its financial reputation intact

The decision by Moody’s to put the UK’s prized AAA credit rating on negative outlook is a bitter blow to George Osborne.

That’s not because a downgrade is imminent, nor even that it would have a marked impact on the economy were it to happen at some point later this year. The recent downgrade experiences of the US and France suggest there is no immediate impact on long-term borrowing costs.

Instead, the blow to the chancellor and the Government is to its moral authority. For the best part of two years, Osborne has insisted it has only been the coalition’s steadfast determination to tackle its inherited debts that has kept the UK’s financial reputation intact.

The chancellor has boasted that Britain was on negative watch when he arrived at the Treasury but was quickly given a clean bill of fiscal health as a result of his austerity drive. Now the UK is on negative watch again and the shadow chancellor Ed Balls must think all his Christmases have arrived at once.

Moody’s said that the main reason it was concerned about the UK was the “weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years.” Translated, that means the economy has slowed to a virtual standstill, making it more difficult to hit the government’s target for curbing debt. That has been the line pushed hard by Balls for the past 12 months, and he has now been vindicated.

Let’s be clear: Moody’s are not saying Osborne should abandon his deficit reduction plans and the chancellor was quick to seize on that. A Treasury statement highlighted the comment from the ratings agency that there certainly would be a full downgrade in the event of any “reduced political commitment to fiscal consolidation including discretionary loosening”. Osborne is clearly not planning any giveaways in what is starting to look like an extremely awkward budget and he said the decision to put Britain on negative watch was a “reality check for anyone who thinks Britain can duck confronting its debts”.

The chancellor is attacking a straw man, however, since there are very few serious people who believe the UK can duck the debt issue. The government’s problem is that it has got the balance of growth and austerity wrong and has now been rumbled. Moody’s noted that a downgrade was possible even if the government sticks to the toughest spending cuts seen in the UK since the 1920s. That could happen if the growth outlook continues to be poor, due to consumers and businesses seeking to reduce their debt levels or because the euro implodes; a sharp rise in market interest rates caused by a loss of confidence in the UK; or by a fresh banking crisis. All three are markedly possible. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds