As predicted Britain’s credit rating has been downgraded from AAA to AA1 by Moody’s Investors Service. According to George Osborne the economic significance of this is not huge. What Osborne would rather not acknowledge is that the symbolism is highly significant.
As I pointed out in a previous blog, being downgraded by one or more of the credit rating agencies is not the end of the world. It happened to France and the United States without any real impact on the cost of government borrowing. So this development is by no means an economic catastrophe, but we should not ignore the fact that it may be portentous.
Since Friday there have been no troubling signs in the market related to the downgrade, except, perhaps, the continuation of the pound’s decline in value. Never the less, this is an important moment politically for George Osborne and the Conservative Party in general.
David Cameron, George Osborne and the Conservative party have for a long time stood on a platform of restoring economic stability, reducing our country’s debt and getting our economy going again. In fact, Osborne stated that losing our AAA rating would be a humiliation, and as Ed Balls said in the Commons on Monday:
“The chancellor needs to get out of denial and get a new plan that will actually work on growth, jobs and deficit. Or else the prime minister will have to get a new chancellor.”
The downgrading is a further nail in the coffin of the Chancellor and this Government’s economic credibility. It has also damaged Osborne’s increasingly shaky standing within the Tory party. The Chancellor’s decision before the 2010 election to make Britain’s triple A status a measure of his success is now seen as more evidence of poor judgment.
The Financial Times yesterday had two damning quotes from Tory backbenchers:
“It was rank inexperience – foolhardiness verging on stupidity,” said one of his colleagues. “He would be OK if growth was ticking along at 2.5 per cent, but it’s not,” said another senior Tory, as he questioned whether Mr Osborne had the skills to cope with the persistently weak economy eroding his political capital. “
Cameron has made it clear that Osborne will remain in the Treasury until the next election, despite this latest in a long line of mistakes. This is bad news the UK, as our economic outlook goes from bad to worse. The credit rating downgrade might just be an embarrassment for Osborne right now, but it could also be a portent of things to come if he doesn’t come up with something to help stimulate growth.