Published on 23 Feb 2013

The UK’s economic strategy: double AA, triple dip, single-minded

So Britain is no longer rated AAA by all the major credit ratings agencies. First the positives: Moody’s move is more a reflection and a reaction, rather than the prospective cause of market mayhem for Britain. The agency has noticed a small fire in our house rather than being the arsonist in an impending inferno. Since December I have been reporting that financial markets fear that a less unstable Eurozone is focusing market attention here. Britain is losing the market “ugly contest”.

There is a journalistic meme circulating that it definitely does not matter, because the US and France lost their AAA and their borrowing rates did not go up. This is spurious extrapolation. Britain is not in the same position.

The US hosts the world’s reserve currency, and its bond yields declined amid the flight to safety after S&P scrapped its AAA. Likewise France is basically a sub-region of the eurozone. When they lost their AAAs there was little prospect of a concomitant sharp fall in their currencies.

Sterling is a lesser reserve currency, and it is plausible that safe haven flows could reverse. To the extent that it dampened down sterling of its safe haven premium, that’s probably good for the economy. If it continued into a larger devaluation, reinforced by monetary policy and deficit doubts, then the overall impact could be inflationary and overall more concerning. We just don’t know how this will play out. It’s wrong just to declare that it definitely does not matter.

This does, however, show up the incoherence of the coalition’s plan to on the one hand, try to rebalance the economy towards exports, and on the other boast about Britain being a safe haven that pushed up demand for and the value of sterling, damaging exports.

The Treasury position at the moment is nonsensical. Losing the AAA doesn’t matter, but look we’ve still got two other AAAs that we don’t want to jeopardise. And by the way if we don’t stick to exactly the same plan, we risk being downgraded again by Moody’s, which really does matter, until it happens, after which we will say it is irrelevant.

What we are really seeing here, is the disappearance of a straw man. The idea that Britain was going bankrupt. We never were. We have very long debt maturities averaging 13 years, versus half of that for problem nations. We have a Bank of England with a massive electronic printing press that it is willing to use. Deficit reduction was always just an intermediate target, the target for any government should be growth, jobs and living standards.

At the moment Britain is getting not much deficit reduction, not much credit from the rating agencies, no growth, some jobs, and declining living standards. We have the prospect of a triple dip, and we’ve lost the triple A. The chancellor remains rather single-minded, immediately promising to redouble efforts on his deficit plan.

The government’s best card is to say, that such was the state of private sector indebtedness, that we were always going to lose the AAA in prolonged period of near zero growth, the deleveraging hangover from the world’s biggest credit binge (under Labour).

That rather begs the question of whether the deficit plan would have had the same flavour and timing, with the benefit of hindsight. On capital spending the government has already conceded it made mistakes. The front-loaded VAT rise used to fund income tax cuts, also had an impact on growth and confidence. Boris Johnson wants the government to pipe down on the austerity rhetoric, and it’s clear that it impacted business confidence in autumn 2010. The credit easing scheme that eventually turned into “funding for lending” was a year too late.

So it’s surely time to think a little more radically. Reasonable people will disagree on whether that is massive tax cuts for entrepreneurs, or massive stimulus for the £310bn of infrastructure investment that the government admits Britain is lacking. Or a bit of both. Housebuilding is a no-brainer. But surely this should start a debate on what has not gone right? Perhaps Labour could be tempted to share some of its secret plans. This might end up being good news. The straw man has been blown over. Now a chance to actually think about how to grow the economy.

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26 reader comments

  1. Philip says:

    It seems to me that the rating agencies are a vehicle for deflation. Their focus is financial, not economic. They appear to have fouled up totally in the boom years before 2008. Their credibility depends on governments like ours giving them credibility. We have blindly followed the failed economic policies of the Thirties. Unemployment may not be as high – but what kind of jobs are they & what is happening to our productivity? Osborne has staked his reputation on this policy (as has Cameron). So there is no way they are going to change direction. On the other side, Ed Balls is damaged goods & should follow the “New Statesman”‘s advice and take a 4 year sabbatical. A Labour party demanding spending, just reminds people of the common perception about the free-spending Labour Goverment “which got us into this mess”. Ed Balls is the public face of that. If you really wanted to rebalane the economy, you’d tax the financial sector much harder and start building houses like there’s no tomorrow.

    1. Edward Harkins says:

      Philip in reply to me 24.02.13 you posted: “Try Roosevelt’s New Deal in the 1930s for a start!”

      Quite, it’s the big case in point – it failed in its principle goal. USA economic recovery came about only once pre-WW2 rearmament got underway. It’s a misfortune that in the USA in particular the New Deal has become a kickball in a rancid anti-Keynes mantra. I suspect that the Great Man himself would have said of New Deal, “No, that’s not the way to do it”.

  2. Michael says:

    Your comment paragraph 9 – worlds biggest credit binge under labour – is I am minde to say is wrong in the extreme, it was not only the labour government that went on a credit binge, in fact Europe and the rest of the world were companions on this cridit binge journey, hence the global dip in some jobs, no growth, and declining living standards.

    as for credit easing scheme that eventually turned into funding for lending, it was a Europe wide creidt easing that started the credit binge, allowed companies to leverage buy-outs etc that began the slide into global stagnation,

    Simply put – it was a buy, buy, buy world on credit, now its a pay, pay pay world.
    l am not a labour voter, and I hear it said by so called experts, financial and political, that it is all the fault of the last government, smell the coffee.

  3. Lauren Huxley Blythe says:

    If a household has huge debts, maxed out cards and no one employed theres no sense in finding money just to pay loan sharks. A new plan is needed not more hopeless opining. Why can’t QE money be printed, and directed towards huge infrastructural projects that create jobs and boost the quality of life for everyone in a forward looking way? Projects such as building houses, replacing water and sewage system, funding renewable energy projects, encouraging young people to open businesses directing funds towards university researchand other essential whole country schemes?

  4. francis says:

    well the idiot Osborne when elected ran round shouting we are bankrupt and we have just missed getting our AAA rating downgraded because he is now in, charge, well we are now bankrupt and we have lost our credit rating, why does he not do the decent and go in his library and do the decent thing, and perhaps his relative Ozzie can get doped up and do his job he could not do any worse.

  5. francis says:

    what goes around comes around

  6. Thomfan says:

    How will this downgrade affect the FTSE on Monday morning?

  7. Andrew Dundas says:

    Endorsing your comments Faisal, I am still left wondering why you didn’t mention those strong criticisms before the 2010 election? Were you taken in by the false rhetoric too?
    Household debts are not truly material. Wealthy households and large firms don’t worry about debts that are many times their annual incomes. Domestic balance sheets of British households are safely many times in excess of their debts. It is that ratio of debt to assets that really matters. Moreover, with interest rates so low, only very low-income households should have any concerns. And they are NOT the ones that hold high debts.
    Truth is that the Osborne-Clegg-Cameron rhetoric before the election (and which C4 repeated without question) was as false and misleading as bank’s sales pitches for PPI. Shame on you for being so misleading!
    Fortunately, the bankers have taken over policy making! Not the derivatives guys, but the Central Bankers. Once again Merve-the-swerve has lived up to that title and taken the hints from Carney (Osborne’s v expensive tutor) and set out to talk the pound down and revive his QE stimuli. Despite his observation that a fiscal change of spend and tax cuts…

  8. MouthOfTheUmber says:

    It only matters politically because the Chancellor of the Exchequer in Hiding made it an election pledge to manitain Britain’s AAA rating, which is why the poor, the old, the vulnerable have been made to suffer, because we had to maintain the AAA rating at all costs.
    But as the policy is should to be a failure the Chancellor of the Exchequer in Hiding has made it clear, the poor and old etc will be made to suffer even more.
    In it’s self thelose of the AAA rating is not important, but the consequences are hugely important.

  9. Edward Harkins says:

    Faisal I’m uneasy that you write about £310bn of infrastructure investment that the government ‘admits’ Britain is lacking. The term ‘admits’ implies some sort of a priori acceptance of big infrastructure expenditure as intrinsically good and that will help get the UK economy out of the Great Recession.

    Many self-regarding interests in the UK are chanting a flawed mantra of ‘more Government spending on large capital infrastructure will stimulate the economy and get us out of recession’.

    The ‘mantra’ is flawed because there is no proven case in history where additional infrastructure spend has worked as a route into significant extra business activity or job creation and thereby out of recession. As the likes of OECD data demonstrates, infrastructure investment is A Good Thing – but only for the laying down of the potential (repeat potential) enhanced long-term performance of an economy. Indeed, the OECD argues that economies such as the USA and UK in particular suffer from an underspend in infrastructure.

    As a tool for recovery from recession, however, additional infrastructure spend is relatively inefficient and ineffective. It also carries with it huge…

    1. Philip says:

      Try Roosevelt’s New Deal in the 1930s for a start!

  10. wobeewib says:

    The Tory-Liberal coalition inherited a growing economy and falling unemployment. The unemployment trending down has recently resumed, but the economy is no longer growing in any measurable way.

    The coalition embarked on a deflation which was reckless, dangerous and probably doomed to failure. We are helter-skeltering on a slow spiral of loss of living standards for the vast majority of our citizens, with no escape plan.

    We are now facing a total debt greater than any we faced under the last Labour Government. It is growing inexorably and there seems no attempt nor pretence by Osborne- Cameron to rescue the situation.

    It suits Osborne and Cameron to grind on with austerity. Maybe they also now believe their own rhetoric – “There is no other way”…. After all, they and their friends will not suffer much however it turns out.

  11. adil says:

    Is house building a no-brainer? Who are we building houses for? The buy-to-let market? I think fueling that market is a mistake. We know accommodation prices are artificially high. It will just result in a glut of empty properties on the market and with such a large number of vacant properties the buy-to-let market will stutter and fall.

    I’m also not sure that the biggest credit binge happened only under Labour. I believe that the previous Conservative government initiated it. Unfortunately, Labour continued it.

    Reducing the amount of red-tape to get startups off the ground would perhaps be a good signal. I think also encouraging startups in local communities especially in the case of those that are unemployed (these back to work schemes only help those that provide the schemes).

    I guess the ratings could be viewed as how we are perceived by the rest of the world. It could perhaps suggest that there is a reduction in faith that the existing scheme is helping?

  12. Hugh says:

    It seems to me it is more a comment on quantitive easing. Any country losing control of their currency and financing government spending by printing cash is a bad risk. The current idea seems to be to inflate their way out of debt as the banks wouldnt survive a fall in the property market. It is time to stop supporting the banks and start thinking about policies that would benefit the people the government are meant to represent.

  13. Will Speak says:

    I have the destinct impression that the fiancial crisis is being “played up” in order to implement social policy that would otherwise be unacceptable to the nation.

    1. SR says:

      If that’s your distinct impression, then I suggest that (a) you get someone to teach you some Economics 101, in very simple English and (b) see a doctor about your tendency to believe ludicrous conspiracy theories.

  14. Philip Edwards says:


    You forgot one other description – “one dimensional.”

    But, really, what do you expect from a system that has always claimed “There Is No Alternative,” and had it repeated like a mantra by its bought-and-paid-for media? Do you REALLY expect Murdoch’s lickspittles and others to have a sudden conversion to honesty? Why be surprised when the BBC economics correspondent Robert Peston writes in his book “Who Runs Britain?” that “…greed is good…” (and where have we heard THAT disgusting claptrap before?)

    Here’s a request to you: explain the following to the citizens of our country –
    1. The meaning of the term “public debt.”
    2. Where and why money is “borrowed” by governments.
    3. Who governments borrow money from, and where and how the lenders got “their” money in the first place.
    4. What say “ordinary citizens” have in the affairs and appointments in the Internal Monetary Fund and the World Bank.
    5. What are the ten richest banks in the world.
    6. Why governments allow the existence of hot money bolt-holes in Switzerland and other off shore “havens.”
    7. Detail the figures for “private debt” and “public debt” in the USA, UK and all other…

  15. Philip Edwards says:

    ….leading economies.

    These are just off the top of my head. There are many others.

    Never mind all the economics gobbledegook and contrives sophistries. Just tell us the truth.

  16. Michael Belavistas says:

    I always thought that depreciation of the currency can only help you if you export competitive products. UK we are told that through the City we provide unique services which have no relevance to the value of the pound. I can only see rising prices for oil and energy as well as in most we buy as we import rather a lot.

  17. Neil Craig says:

    We would be out of recession in weeks, possibly days, & fairly quickly matching the average non-EU world growth rate of 6% annually, if the LabConDems wanted it.No politician, journalist or broadcaster who is not corrupt denies this.

    C4 “News” knows this perfectly well which is why they simply censor any discussion of the economic policies of UKIP, which would and will achieve such growth.

  18. Andrew Dundas says:

    An excellent point made by Edward Harkins!
    In the 1930s, when war was expected, it diverted attention from trivia about “deficits’ and ‘national debt’ onto matters of real consequence. E.G. Like defeating aggressive enemies.
    During the Napoleonic & German/Axis wars we ran up huge deficits – we couldn’t have won without them. The consequences were enormous national debts, rising “GDP”, massive destruction of human & productive assets; with full employment & rising incomes (especially in America). Never before in the history of human conflict was so much spent on vast debts and destructions. Only the few worried about those deficits. Never before were we rightly grateful for all those actions that caused so much debt.
    The incoming Labour Gov (1945) was saddled with monstrous debts many times GDP. Moreover, interest rates did not rocket upwards. They stayed low because there was no silly Rating Agencies.
    Excellent point: deficits & debts have no importance when other issues distract our scribblers.
    I wonder what happened to ‘balance of payments’ – why isn’t that a talking point anymore?

  19. Nimal says:

    We all have acted all this time as if the world is governed by free market forces and yet the market has never been free. It has always been manipulated by speculators, fraudsters, corrupt bankers and the financial mafia institutions. To continue as if it is a free market will only lead to a major social tsunami. That is why I would like to suggest that the free nations in debt develop a strategy along the lines to the Chapter 13 in the US. Let all free nations in debt get together as a single block, pool their debts together and negotiate with their lenders en-block on a plan to pay back the debts at a fix lower rate of interest, over an agreed period (say over 10 years) based on an agreed repayment plan. The faster the recovery of an individual nation the quicker it will be able to settle its debts. If lenders do not agree then let all the free nations in debt declare themselves bankrupt en-block. That way they can start again with a clean sheet of paper. If we continue in this further borrowing mode we will end up running even more debts, having to sell all national assets, give away the remaining infrastructures at rock bottom prices to China, Middle East and Russia and become…

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