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.