Rating downgrade a ‘humiliating blow’

**On August 4, 2011, Credit rating agency Standard & Poor’s (S&P) downgraded its credit rating of the United States from AAA to AA+. On January 13, 2012, S&P decreased its credit rating for France from AAA to AA+. Last Friday, Moody’s Investor’s Service decreed that it was the United Kingdom’s turn.**

Five years on from the spark of the Economic Crisis, the lowering of the UK’s credit rating to AA1 may come as a surprise. The UK is no longer in recession. Unemployment fell to 2.5 million in the last quarter and the budget deficit has remained constant. Despite this, Britain’s growth rate, as accurately described by Moody’s, is ‘sluggish’. Other than 0.9 % growth in one quarter, an anomaly caused by Jubilee celebrations and the Olympic Games, the outlook has been frail. Britain has either been in recession or edging on recession for half a decade.

National debt has risen to £1,350 billion. It is estimated to rise annually by £120 billion. This will add to the already sizeable yearly interest repayments of £43 billion. The government’s failure to balance its books, live within its means, cut far and fast enough has lost the confidence of a Credit rating agency and yet, austerity has lost the confidence of the public.

When placing the UK in a European context, the downgrade is hardly novel. Austria, Belgium, Cyprus, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain have also experienced reduced credit ratings since 2008. This does not retract from the political and economic fallout. Chancellor George Osborne had staked the reputation of his policies, party and country on the UK’s credit rating.

The 2010 election manifesto promised to ‘safeguard Britain’s credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament’. This vow lies in tatters. The Conservatives’ own words now help to undermine the credibility of their supposedly credible plan. Osborne stated in July 2012 that the UK’s triple A rating was “a reminder that despite the economic problems we face, the world has confidence that we are dealing with them”. What great symbol does the UK have left to remind the world of its economic credibility? The Shard? As Ed Balls put it, this is indeed an “humiliating blow”.

Conversely, the downgrade itself inflicts no formal economic effects. Much like a release of statistics, the information alone does not harm the economy – the impact comes from the market. There is no growth due to demand-deficiency and demand is modest as a result of low confidence. A downgrade only causes confidence, and therein consumption and investment, to deteriorate further. This recession fever could be classified as an ‘anti-wealth effect’, the wealth effect being where people feel wealthier and so spend more money. As with the publication of unimpressive macroeconomic statistics, downgrades send discouraging signals. After the US downgrade, US stock indexes declined up to seven per cent in one day.

Are investors en masse going to refuse to invest in the UK? Probably not. Despite its stagnation, the UK boasts the sixth-largest economy worldwide. This is not a government with instability enough to default on its debt.

Will the cost of government borrowing increase? That depends on the quantity of eager investors. The economic climate already provided consumers and firms with apprehension; now, Moody’s decision will have only validated such sentiments.

It is not the case that the loss of this credit rating was inevitable. Labour could have managed a balanced budget after 1997. Had Tony Blair and Gordon Brown refrained from the policy of ‘jam today rather than jam tomorrow’, i.e. borrowing money to increase spending to win the popular vote, the country could have borrowed money for jam when it was starving.

Accountability also lies with the Conservative-Liberal Coalition. The government could have balanced its books. At the cost of jobs and consumption, public spending could have been decreased until it equalled government receipts from taxation. At the cost of macroeconomic stability, taxes admittedly could have been raised. The government had the ability to achieve a balanced budget. Instead, politicians allowed a continuous annual loss of £43 billion in interest repayments, the loss of the credit rating and prolonged misery.

The UK government was lenient. It was met with student riots, Occupy St. Pauls and media chastisement all the same. Proper austerity, unlike the insufficient measures undertaken in recent years, is yet to come.

As for the downgrade, the market already knew of the UK’s stagnation. Moody’s decision is no more than official recognition. It is testament to the government’s inadequate progress in a ruthless and necessary direction.

To what does a Credit rating downgrade amount in this bleak tale? We have yet to see whether this self-fulfilling prophecy fulfils itself.