Politics Magazine

What Difference Will the Downgrading of the UK’s Credit Rating Make to Plan A?

Posted on the 25 February 2013 by Thepoliticalidealist @JackDarrant

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As the credit rating agency Moody has decided to downgrade Britain’s credit rating from a Triple A rating to Aa1 rating, what impact will this cause for the Government politically and economically?

Looking at Moody’s actual report regarding the downgrade, there is quite a few reason as of why they decided to take that decision, as some are shown below. [1]

“1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.”

In addition to “sluggish growth” they also cited “increased uncertainty regarding the pace of fiscal consolidation” – effectively saying that they believe that spending cuts have not been fast enough, and as a consequence the UK’s debt levels have suffered as a result. The actual report, does not criticize the Government’s policies, but highlights the difficulties the Coalition Government has to face with lack of growth, the Global economic situation, and the high debt levels of the UK, which is not necessarily the result of the Chancellor’s austerity, but simply that he has not been not cutting fast enough to Moody’s preference.

Another interesting point is the timing of the decision to downgrade Britain’s credit rating with the Chancellor’s budget due next month in March. This surely indicates the bad economic news of the deficit rising in 2012, and the very possible reality of the UK sliding into a Triple Dip Recession this month has forced Moody’s hand to downgrade the UK’s credit rating earlier than expected.

However, this does question Osborne’s political judgment to put defending the Triple A rating at the head of all Economic credibility of his austerity policies. In 2009 when Britain’s credit rating was put on a negative outlook, Osborne said that: “It’s now clear that Britain’s economic reputation is on the line at the next general election, another reason for bringing the date forward and having that election now…” [2] If the UK’s credit rating being put on a negative outlook deserves an early election, surely Osborne will agree a downgrade deserves an early election in the current situation? Even in the 2010 Conservative Party manifesto it stated: “We will safeguard Britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament” [3] Furthermore, whenever Osborne’s economic policies have come scrutiny, his retort has always been Britain’s Triple A credit rating and historically low interest rates (Influenced by the Bank of England’s record level of Quantitative Easing).

Overall, this move to downgrade the UK’s credit rating to Aa1 will be a political effect and not an economic one, with more economically strong nations such as the US & France lost its Triple A rating last year too, and has not affected them to borrow, especially when the Credit Agencies have faced criticism from the EU and numerous countries, for their decision to downgrade several countries. The more important economic issues right now is the current depreciation of the Pound Sterling that is simply not improving exports as otherwise would be expected, due to the troubles of the eurozone (Our biggest trading partner), whilst at the same time, living standards will deteriorate further as imports will become more costly and with imports becoming more expensive, cost-push inflation will occur.

If the GDP figures in the first 3 months of 2013, show that we’re in a Triple Dip recession, Labour must surely be considering what more bad economic news do they need to show austerity is failing? And with that economic reality, Osborne must finally change plan A in the form of focusing on investment, jobs and green energy, that the UK vitally needs.

 

Written by Lily Jayne Summers.

 

(Editor of The Political Writer.)
[1] – http://www.moodys.com/research/Moodys-downgrades-UKs-government-bond-rating-to-Aa1-from-Aaa–PR_266844
[2] – http://labourlist.org/2012/02/quote-of-the-day-george-osborne-calls-for-an-election/
[3] – http://media.conservatives.s3.amazonaws.com/manifesto/cpmanifesto2010_lowres.pdf


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