A downgraded government – but is that enough for Labour?

February 25, 2013 3:48 pm

There can be no overstating the political and economic importance of last Thursday’s announcement from Moody’s ratings agency, that it is downgrading the UK’s credit rating to AA1. And the fact that financial markets were expecting it by no means lessens that importance.

What does this mean? Simply, it means that the world’s economists think that instead it being virtually impossible that Britain declares itself bankrupt, it is merely highly improbable. Sounds a bit anodyne, doesn’t it? It’s not.

First, there are important historical events in the economic life of a country, things ordinary people who have lived through them are unlikely to forget. It is probably not up there with the devaluations of the pound of 1967 or 1949, or the Great Depression. But it is certainly of historical importance, in that it is the first Moody’s downgrade since 1978.

It’s the first downgrade since the year of the Winter of Discontent? Well, that makes sense, the economy was in a real mess in the Callaghan years, right?

Wrong. It’s actually worse than that: it’s because Moody’s only started rating the UK in 1978. So, had it been rating the UK for longer, it might have been the first downgrade in more than 35 years.

Second, the impact on ordinary people and businesses is significant, as they will inevitably have higher mortgages and financing costs, respectively.

In short, it’s very bad: undoubtedly a big blow to the government, and to the credibility of George Osborne as Chancellor. It is also a vindication for Labour’s economic policy: essentially Moody’s name-check over-harsh austerity as a key reason for the downgrade.

So, we just reap the rewards of that vindication and cruise back to office in two years, right?

It’s not, sadly, as simple as that. As I wrote here two years ago, the vexed issue of this Labour opposition’s economic policy has always been about the politics, not the economics.

We have not one, but two jobs to do: one, the here and now: to convince the public that Osborne’s policy is wrong. And second, to convince them that we are now trustworthy enough to take over.

On the first job, we are now much closer. Not just economists like Paul Krugman, who has seen this strategy as masochism from the start, but Moody’s themselves and the IMF now clearly blame austerity. It is difficult to see the strategy working, if it hasn’t already. And the reason is simple: the downgrade, all other things being equal, increases the interest payments that the government is making, and therefore makes money more scarce and austerity bite even harder.

Oh, and the one potential silver lining from a downgrade cloud, that the resulting devaluation of sterling might encourage a recovery fuelled by cheaper exports, looks remote in a country with a big trade deficit.

Furthermore, the chances of a radical policy change on the part of the government, looks very remote indeed. Austerity is the glue holding the coalition together, so expect it to be defended far beyond the point which is economically reasonable, because an admission of failure is too unpleasant for anyone to contemplate. If Cameron were a more ruthless, audacious politician of the style of, say, Harold Macmillan, he might try and do a deal with Clegg that they would blame it all on Osborne, and sack his failed Chancellor. But Cameron does not seem to be that kind of politician.

Economically, it’s a nasty, pernicious Catch-22 that the government has got us into.

On the second job, though – winning the public over to trust Labour again – we are still not there. Economically, “not too far, not too fast” has always been the right policy since Darling suggested it before the last election. The problem has been that the British public didn’t buy it and, according to opinion polls, still don’t. And that is, to state the bleedin’ obvious, is because they still see us as the cause of the problem in the first place.

While Balls is being vindicated on the economics, his association with Brown is still helping kill the politics.

Because even if “not too far, not too fast” is being vindicated, Brown’s earlier borrowing is not, fairly or unfairly. Like it or not, this is still all about debt: Labour maxed out the credit card, blah, blah, blah.

Disingenuous. Yet still surprisingly effective.

And one further thing may yet save the Tories. It is the simple fact that, as the BBC points out:

“Germany and Canada are the only major economies to currently have a top AAA rating – as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.”

In other words, if they simply point at other countries and say “well, er, look at them, they’ve all downgraded too”, they may just get away with it. Moody’s have also said a further downgrade is unlikely. A good job for them, because a further downgrade surely would make the government’s position untenable.

The truth is that those other countries largely have some kind of excuse. If the US has had a downgrade, it is because it has borrowed to grow, and things are now looking optimistic. If major Continental European countries have, it is because they are tied into each other and cannot, self-evidently, devalue. Others merely have weaker economies and get battered harder by economic storms.

The sad thing for Britain is that it does not have that excuse – its economic fundamentals are not that shaky, like the economies of southern Europe. It can devalue. And it is not on the edge of recovery, like the US.

The sad thing for Britain is that this is simply inflicted by the stupidity of a bone-headed government.

As the Opposition, we can all feel a bit self-satisfied today. But soon we must start presenting our concrete, alternative economic policy. And then fervently hope that the British people will give us the benefit of the doubt.

  • Dave Postles

    It’s not just interest rates, but the inflationary pressures from the cost of imports. Will people resign themselves to further reductions in their standard of living or will there be wage pressures?

    • http://twitter.com/rob_marchant Rob Marchant

      True. Although that effect is at least tempered by the possibility of buying more competitively at home than previously – in the case of our mortgages, they will just be up, and that’s it.

      • Dave Postles

        Petrol prices will have incremental impact on most other prices.

  • John Ruddy

    “his [Balls] association with Brown is still helping kill the politics.”

    Rob, I thought we had covered this ont he other post about Balls. The general public dont associate Ed Balls with Gordon Brown in that way. It is a Westminster bubble thing – and no matter how much the tories TRY to do so, the public are not doing so. Lord Ashcrofts own polling and focus groups have shown this.

    • http://twitter.com/rob_marchant Rob Marchant

      I don’t remember that comment on my Indy piece, but it’s an interesting thought. That said, I think it’s less the direct association in the minds of the public anyway. It’s about the lack of manoeuvre it gives Balls himself. Which was the point of that piece.

      • John Ruddy

        I was talking about the posting about the call for Ed Balls to stand down because his association with Brown is affecting Labour VI etc.

        lack of maneouvere? This is the man who helped keep us out of the Euro, helped give the Bank of England independence, predicted the double dip, got it right about too far, too fast – he’s bascially got right almost every economic call of the last 15 years (Bank regulation apart, which he admits). He’s therefore got masses of manouvere!!!

        • http://twitter.com/rob_marchant Rob Marchant

          Oh, well we’re talking about completely different things. I have never, ever called for Ed Balls to stand down.

          • John Ruddy

            Then what do you mean by “his [Balls] association with Brown is still helping kill the politics.”
            My point is that it is doing no such thing – as evidenced by the fact that the public dont see that.

          • http://twitter.com/rob_marchant Rob Marchant

            That is not calling for someone to stand down, it is acknowledging a weakness. I’ve already answered you above: there (i) is an effect on the public perception, albeit not perhaps a great one. But more importantly, (ii) it means that he cannot easily take up policies which he was previously associated with opposing.

            I’ve been entirely consistent, you just don’t agree with what I’m saying.

  • robertcp

    Labour’s policy in 2015 should be to gradually reduce the deficit until the National Debt starts declining as a proportion of GDP (or is it GNP?), which was the normal situation for most of the post-war era. This does not mean extreme austerity but we can forget about big spending increases on education, health and welfare for the next decade or so.

    • NT86

      That’s the most prudent policy, but the Tories’ main line of defence is to viciously attack that with their economically illiterate rants about how national debt should be treated in the same way as household debt. They have been able to get away with this line for sometime. But given the downgrade, let’s see how well they can convince the public now.

      • http://twitter.com/rob_marchant Rob Marchant

        Still quite well, I’d say. As the piece says, we haven’t won this debate, yet.

    • http://twitter.com/rob_marchant Rob Marchant

      That’s about right, in fact it’s more or less what Balls has already said. Sadly, until we can say *how* it’s going to be done, it’s going to sound like empty words to the general public.

  • postageincluded

    A straw man argument. Of course “we told you so” can never be an adequate policy platform – who is suggesting that it is? Are you really suggesting that the Eds are planning not to have any policy?

    The argument is not about whether, but when. Your judgement is “soon”. My judgement, and is “When the time is ripe”, and though the downgrade is a step towards ripening the time, we’re not there yet. This is not the opinion of many on the left and right wings of the party, but, thankfully, you are being ignored.

    • http://twitter.com/rob_marchant Rob Marchant

      Not half as straw man as this response. Where did I talk about “I told you so”? I didn’t. Labour’s economic policy is still largely fuzzy, although there have been a few rays of sunshine, like the 10p tax pledge.

      I would agree that there is a balance between too early and too late in declaring one’s policy hand. However, I am able debate it with people who disagree with me without the emotive language.

      • postageincluded

        You’ve misunderstood, Rob. “I told you so” is my summary of a point of view that you are contesting, and are surely right to contest – the belief that we can, as you put it (rather emotively I think), “just reap the rewards of that vindication and cruise back to office in two years”.

        What I don’t see is that “reaping the rewards of vindication” is being put about as a credible strategy by anyone of any importance or influence in the party. And even if it were I just don’t think that the silliness of such an opinion implies that there should now be a grand rolling out of specific policy commitments now, or even a generalised “de-fuzzying” of economic policy. The sack would be a more appropriate response. Meanwhile we should be waiting until we can see the whites of their eyes, not pinning a target on our chest and shouting “Fire!”

        • http://twitter.com/rob_marchant Rob Marchant

          You may be right about reaping the rewards of vindication and the upper echelons of the party – the comment was aimed as much at the community of party members and supporters as anyone. But please don’t suggest that there is no-one making that argument in the labour movement as a whole, or not at senior level, because it’s not true. You have only to visit Liberal Conspiracy to hear the shrill echoes of “I told you so”.

          It is a delicate balance, as I say, when to jump in with policy commitments. But at the moment there is very, very little to go on, even at very high level. And we can’t wait forever.

          You have made your point clear – it’s just that I don’t agree with it.

  • rekrab

    Surrounded and confounded!

  • rekrab

    Surrounded and confounded!

  • Daniel Speight

    ‘Let’s have less regulation, no more big state’ cry the Tories.

    ‘Let them eat horse’ answers the food industry.

  • Daniel Speight

    ‘Let’s have less regulation, no more big state’ cry the Tories.

    ‘Let them eat horse’ answers the food industry.

  • Daniel Speight

    While Balls is being vindicated on the economics, his association with Brown is still helping kill the politics.

    Rob is correct of course, much as we wish he wasn’t at this time. Leading members of the shadow cabinet and the PLP are tainted by their previous positions in the Blair and Brown new Labour governments. It was a shame that the only one of the leadership contenders to be free of such stains was Diane Abbott who didn’t really stand a chance anyway. Of the others we could probably say that Ed Miliband was the least besmirched, or at least the fastest to disown his previous sponsors.

    Still much a I would like to see a cleaning out of the Augean stables of our political class we must be aware that those running such cleansing campaigns have often turned out to be far worse than the initial problem. One just has to think of a certain Tony Blair clearing out the ‘old’ Labour party operators. Would he have had the support of the Party if they knew that in a few years time, after Iraq and so on, he would be such toxic brand to the public and handed over a party system with such centralized control and staffed by apparatchiks and careerists to level unknown in the past.

    Still much as like the yokel giving road directions we would prefer to start from somewhere other than here, that’s not possible. It’s certainly not much use looking for answers in the likes of Darling and others that failed us so spectacularly. Now like Rob I would also claim to look for a Keynesian economic answer*, but that cannot be the whole answer. We need to look at how the cake gets sliced. We have been through almost forty years of a neo-liberal consensus where we reward the wealthy and hope for a trickle down of riches to those below. It must be admitted that at times this has worked, but in the last ten years or so we begin to see those other than the richest experience either stagnating or falling standards of living.

    It is this that should be how we take the fight to the Tories for 2015. How should the cake be sliced. Why should Britain roll over and let the tax-avoiding multi-nationals tickle its belly. What sort of Britain do we want. If it comes to the crunch I would rather be in a Sweden-like country than an America-like one. Looking for middle paths often leaves you in a ditch.

    Now I hope nobody feels that this sounds anodyne;-)

    * I hope I am not misremembering Rob on this, or mixing him up with Anthony Painter again.

    • http://twitter.com/rob_marchant Rob Marchant

      I’m a kind of semi-Keynesian, at times I am, at others not. In this case a good bit of old-fashioned Keynesian stimulus wouldn’t have gone amiss, no.

  • AlanGiles

    There is a lot of truth in many old expressions, so, with Italy in mind this morning, perhaps I can quote one? “However badly off you are there is always somebody worse off than yourself”.
    How true when Italy faces the prospect of that old whoremonger Berlusconi back in charge of the Upper House again.
    Some – (many) – of our politicians are bad, but are any as bad as this criminal old joke?. I think not. The best you can say for him is that he is honest about his dishonesty. A man who, if he is not totally gaga and dissipated ought to by now, be put in the dock, and if found guilty, sentenced according to law.
    When you look at that old scumbag, it sort of puts your own problems into perspective. Also, of course, the uncertainty in Italy will do nothing for their, or Europe in general, economy

  • AlanGiles

    There is a lot of truth in many old expressions, so, with Italy in mind this morning, perhaps I can quote one? “However badly off you are there is always somebody worse off than yourself”.
    How true when Italy faces the prospect of that old whoremonger Berlusconi back in charge of the Upper House again.
    Some – (many) – of our politicians are bad, but are any as bad as this criminal old joke?. I think not. The best you can say for him is that he is honest about his dishonesty. A man who, if he is not totally gaga and dissipated ought to by now, be put in the dock, and if found guilty, sentenced according to law.
    When you look at that old scumbag, it sort of puts your own problems into perspective. Also, of course, the uncertainty in Italy will do nothing for their, or Europe in general, economy

    • Daniel Speight

      So they have Berlusconi and we have Rennard. They have bunga-bunga and we have …

      OK Alan perhaps you are right!

    • Hugh

      Yes, but he did prove the catalyst for perhaps the most ill-conceived political protest in history: topless protesters against him. Like pelting bankers with £50 notes, surely?

      • Hugh

        Evidently Silvio is a reader.

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