Monday, 25 February 2013

Why Britain's Credit Downgrade "is no mere technicality"

Following Moody's decision to strip the UK of its AAA rating on Friday (the UK's first ever sovereign ratings downgrade from a major agency), Mark Littlewood, director-general of the Institute of Economic Affairs, lists three reasons why the downgrade "is no mere technicality" (my bold).

Reason 1,
George Osborne told us that the retention of the triple A rating was one of the key measurements of his credibility.
Reason 2,
The government’s initial plan was to see the national debt as a proportion of GDP falling by the time of the next general election. That has already been kicked far into the long and distant grass. Don’t expect it to happen until the middle of the next Parliament at the very earliest. Instead, the coalition will actually add around £600bn to the national debt over their term of office – around about £10,000 for every man, woman and child in the United Kingdom. Overspending on this scale is extraordinary, no chancellor will ever have added so much to the national debt so quickly. It is hard to honestly describe such a policy as taking “tough measures” as Osborne insists on doing in press interviews. 
Reason 3
It has already been the trigger for a public debate about whether the government should “change course”. Given the course the government has set is to spend hundreds of billions pounds it doesn’t actually have and to fail to embrace any genuinely radical supply side reform to help kickstart the economy, I, for one, would be delighted to see the government change course.
Sadly, the debate is yet to be framed as being between those who believe that the massive Keynesian fiscal stimulus of recent years has been a failure and those who wish it to continue. Rather, in the House of Commons at least, it is between those who think that this administration should cap overspending by the state to about £600bn and those who think that if we only increased this level of fiscal incontinence to £700bn or £800bn, things would be sure to improve in short order – their response to the failure of massive government spending being that we need even more of it.
Whatever Osborne’s short term political future, he risks his legacy being that of a man who talked of making savings and balancing the books but became just another in the long line of politicians to prove that an old-style, “spend now, worry later” Keynesian fiscal stimulus simply doesn’t work. 
In addition to the above, the printing presses at the Bank of England are running hot. Seems like the UK has fallen for the charms of the false economics Messiah Paul Krugman, following the path set by Gordon Brown. Conservative v Labour in the UK is no different than Democrats v Republicans in the U.S. when it comes to deficit spending and big government.

Read the full article here.

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