Here’s Osborne in April 2012, following S&P’s decision to affirm the UK’s AAA credit rating:
“This is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times…The budget showed we are ready to go on making the difficult decisions that are keeping our country safe. Once again we are reminded that those who want to spend and borrow even more would lead our country into an economic catastrophe.”
So the AAA rating proved austerity was the right thing to do and changing course would risk losing it which would lead to “economic catastrophe”. But hang on a minute. Today, horror of horrors, another ratings agency – Moody’s, does downgrade the UK. Economic catastrophe? What does Osborne think now?
“Tonight we have a stark reminder of the debt problems facing our country – and the clearest possible warning to anyone who thinks we can run away from dealing with those problems…Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it…
…[Moody’s] make it absolutely clear that they could downgrade the UK’s credit rating further in the event of ‘reduced political commitment to fiscal consolidation’…We are not going to run away from our problems, we are going to overcome them.”
It’s a little confusing because it seems that a AAA rating means austerity is the right thing to do, because losing that AAA would be a disaster, but in the event of actually losing the AAA rating, that also means austerity is the correct path, because the alternative would be much worse. If I didn’t know better, I’d say George Osborne doesn’t know what he’s doing.
* While now is the time to mock George Osborne, it should also be said that while the economic impact of the downgrade is uncertain, in reality it’s unlikely to amount to anything significant. Moody’s are actually making themselves look a little foolish by downgrading another country with its own sovereign currency, who’s risk of default is near enough zero.
Yesterday, OBR Chairman Robert Chote appeared before the Treasury Select Committee to discuss the OBR’s forecasts for the Autumn Statement. About an hour in, Conservative MP Brooks Newmark asked Chote what would happen if Britain lost it’s AAA credit rating. Remember that for the last 2 and a half years, George Osborne has based his whole economic strategy upon preserving our AAA rating – to lose it would apparently mean higher interest rates, less investment, lost jobs. But here’s Robert Chote responding to Newmark:
“Well it’s not entirely clear that that [a downgrade] would be providing any new information to the markets that they hadn’t already managed to deduce I think from the information on which presumably the credit ratings agencies would have drawn their conclusions. I think we’ve seen other countries suffer that, and it’s not had an obviously noticeable impact on market views. Obviously, the notion of how sensible it is to view this as a change in default risk, when the notion of default risk for a country that basically can print its own currency, is a slightly debatable premise to begin with.“
Here’s the video. The relevant bit starts at 10:31:30:
A downgrade of our credit rating downgrade now looks inevitable and apparently Osborne’s colleagues in the Cabinet are urging him to do a 180 and start downplaying the consequences of a downgrade.
The way this story is changing reminds me a bit of the last Labour Government’s changing story on the invasion of Iraq. First they attempt to scare us into accepting some awful policy (WMDs or Greek style bankruptcy), then they change it to a story about human rights (or now, changing the ‘benefits’ culture). Finally, once the policy is embedded, the story becomes “If we turn back now it would be a disaster”.
So from Robert Chote, we now know losing our AAA rating probably won’t much effect interest rates. We know the mantra “There’s no money left” is idiotic (we have our own currency). We also know that changing course would not lead to disaster as Osborne contends. At the end of the video, Chote also says that an increase in Government borrowing wouldn’t necessarily have any impact upon market expectations either. So what rationale for persisting with austerity remains?