Coffee House

A warning for Osborne and his economic agenda

14 February 2012

Why did Moody’s downgrade Britain to AAA with a negative outlook, but leave other countries on AAA? One crucial factor is the scale of our debt increase: 60 per cent over the parliament. You
won’t find it mentioned much today. The Chancellor is talking about austerity, helped by Balls who talks about his harsh deep cuts. Osborne today swears to keep ‘dealing with the
debt’ — but his definition of ‘dealing with debt’ would even make an Italian blush:

As Balls said on the radio this morning, the plan isn’t working. But Balls’ narrative — that Osborne is cutting harsh and deep — is untrue, as Moody’s knows. Osborne’s real plan is a
massive debt increase, bigger than Labour proposed, and as you’d expect this is doing precious little to help growth. Little wonder there are nerves abroad. The Chancellor now doesn’t even
have a plan to balance the books. His budget plans run all the way to April 2017, and even then he proposes deficits. It’s by no means clear how Britain will cope with this debt, given the
evaporating recovery — which looks pretty bad by international comparisons.
While America is gathering speed, here’s how we fare in comparison (the UK is in purple, at the bottom)::

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I suspect it won’t be long before Osborne mentions his low gilt yields: the interest charged on a UK government ten-year note is now 2.13 per cent. Osborne has been a playing a tiny wee trick
here, making out that this low figure is vote of confidence by the market in his deficit reduction plan — one not expressed towards the French and the Greeks. But he’s doing something
they’re not: artificially lowering the cost of his debt with a QE scheme already up to £275 billion and (unlike America’s) devoted entirely to buying government debt notes. Pretty
soon, the Bank of England (wholly owned by the UK government), will own a quarter of all UK government debt. The below graph, from a CitiBank report, shows the extent of BoE manipulation of the UK
national debt market:


Without QE, and left to the markets, I suspect Britain would have lost its AAA rating a long time ago. As my colleague Jeremy Warner put it:

‘Let’s get this straight. By switching on the printing presses, the Bank of England, which is 100pc owned by Her Majesty’s Government, is buying up a third of the debt owed by Her
Majesty’s Government. The Treasury is becoming ever more in debt to itself. It’s as strange as that.’

Perhaps Osborne has no choice but to do what he’s doing. But does that really mean that no-one should discuss what’s going on? In the downgrade debate today, I suspect no-one
will mention what Moody’s sees all too clearly: the scale of the debt increase, and the effect of QE in keeping the price of government debt artificially low. To listen to Osborne go on about
austerity, it’s easy to forget that he’s attempting one of the biggest debt increases in the developed world, midway through one of the weakest recoveries, all washed down by the biggest
QE experiment the world has ever seen.

For ideological reasons Miliband and Balls won’t mention debt, they don’t regard it as a problem. And because QE makes debt cheaper, neither will quibble with that either (Balls didn’t
this morning). Osborne can only get away with his proposed borrowing binge if he can think of some ideas for growing the economy (Bruce Anderson outlines a few today). We’ll see in next month’s Budget if
Osborne can do any better. Moody’s has today reminded him what will happen if he doesn’t.

PS Some CoffeeHousers take exception to my use of the phrase ‘downgrade’. Yes, we still have AAA but being switched to negative puts us on a different, lower grade. As were some others. But a
notable list — The Netherlands, Sweden, Finland and Denmark — were left untouched. Orwell would have a field day with the use of language in economics: the way that
Osborne claims he is ‘paying down the deficit’ (impossible, a deficit is an increase in debt) and the way Balls said Labour reduced debt, when he meant increased it (but decreased the debt/gdp
ratio). Even the word ‘deficit’ is one understood by only a small minority; polls show most Brits think the national debt is falling. So I’m all for using straightforward language as possible, and
when Moody’s puts is on a lower rating than we were before then I think we ought to say so.

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Show comments
  • NickW

    This is a USA Presidential election year and the statistics coming out of America have been subjected to the correction factors which school boys use in their physics experiments.

    What do you need to do to the data to get the answer you want?

    The American recovery is the result of statistical manipulation. Problems will come when the US administration starts to base its policies on false information, successfully concealing the truth from itself as well as the electorate.

  • 2trueblue

    Apart from trying to grow the economy the Tories must continually produce the details of the debts that are still there and growing, i.e the PFI deals which impinges on our ability to deliver and maintain a good standard of health care. Balls and Milliband do need to be faced with the facts. The media is lazy, unwilling and in some case down right ignorant as to what the debt, deficit, really means.

  • Colin Cumner

    Miliband and Balls don’t regard our national debt as a problem – not suprised they would think this way since Labour always spends (our) money like a drunken sailor when they are in office and would do again should they ever be returned to power. However, knowing the reason for Britain’s finances being in such a parlous state is one thing, fixing the problem is quite another and although traditionally, the Conservatives have been regarded as the Party that pulls us out of the economic mire a period of Labour rule creates, there seems to be no sign of their being able to do so this time around. In fact, this present administration is piling up even more debt for future generations to cope with – or not. A bleak prospect indeed.

  • cg

    I wonder how Russell (first poster) would react if someone casualy suggested he should be put on the dole?

  • daniel maris

    Mac’s critique of Spectator forecasting is devastating because accurate.

  • I S

    So, what next?

  • Kevin

    “never, of course, stop the wasteful merry-go-round and bring back sound money”

    Heartless Curmudgeon goes where Fraser apparently fears to tread (at least in this posting). The lack of sound money must be a deterrent to companies and individuals investing in their future, knowing that the cost of investment will be multiplied by the erosion of the remaining cash not invested.

  • daniel maris

    It never ceases to amaze me how you try and make out green energy policies harm the economy. Look at the graph: who’s doing well? Sweden – committed to becoming the first oil-free country by 2020. Germany – similarly committed to 100% renewables policy. Denmark – also pursuing mass investment in green energy.

  • daniel maris

    The UK is like a bath that has been filling up…until the water actually overflows the sides, things don’t seem too bad. But the mass immigration tap just keeps flowing: asylum, illegal immigration, guest workers, overstaying students, bogus marriages, EU incomers…500,000 per annum, many of whom have no hope of finding regular employment on the job market.

    We are losing AT LEAST about 0.5% growth to mass immigration per annum.

    In London parts of the schools, health and transport infrastructure are close to breaking point.

    Stopping mass immigration will help but the government cannot deliver on that, so it lies.

  • Baron


    most likely the banks put it on deposit with the BoE in case it’s needed to cover any write-offs when the likes of Greece default fully or in part, if the banks find they’ve horded too much (Baron believes they have) the money will find its way into the street, inflation will soar.

  • Baron

    It may be strange the BoE is likely to hold a third of the Treasury gilts, but does it matter? what should concern the policy makers, the pundits like Warner is what’s happening to the cash the banks got for the paper….

  • Sterence

    In the interests of clear terminology, you might also say that it is the yield on gilts that is being kept artificially low, not the price, which is artificially high. (The cost to the nation, at least of newly issued debt, is being depressed – any change in the price of existing debt held by the BoE is offset by an opportunity cost/profit at the Treasury).
    You are quite right that the terminology needs to be kept clear and as simple as possible – doing the precise opposite was of course one of Brown’s many weapons.

  • TrevorsDen

    This is cobblers – it does not take the brain of britain.
    Nelson publishes a graph which purports to show the UK doing twice as bad as Greece and all from a base of 2007. This is a bag of shite and plainly wrong on any evaluation.

    And the debt increase is not bigger than labour proposed. This is a plain disengenuous lie. Labours proposals were pie in the sky and no matter how Nelsons fantasy graph is constructed it would be worse under Labour since they would have hit the same Eurozone buffer – on top of spending and borrowing more anyway.

  • Cynic

    Balls … talks about [Osborne’s] harsh deep cuts. What harsh, deep cuts? We’re still borrowing more! We need to cut expenditure (the EU and foreign aid are good places to start). We also need the long-promised (but obviously forgotten) bonfire of the QUANGOs. Slim down the State. There is no problem to which the answer is more government interference.

  • michael

    I wonder how forward thinking Moody’s investor services dept are … must be beneficial to be on the inside track.

  • Publius

    On your PS, Mr Nelson, being put on negative watch is *not* the same as a downgrade, in spite of your protestations to the contrary.

    If you want to use language accurately, as you claim, then call it what everyone else calls it.

  • Anonymous

    How does QE make the debt cheaper? Surely, by depressing the currency, QE increases the currency exposure of foreign investors, so wouldn’t they demand higher interest rates? I know I would.

  • Tankus

    We are also printing to cover our debts . We are going to inflate ….we are going to have to increase interest rates , and all the domestic grief that entails from the post 2006 debts against property used as collateral.

    …..there is a monster coming

  • Lucien Crofts

    So finally the truth is out! Moving the national debt sideways within the government to borrow even more. If it all goes wrong, is our debt just to big to bail out?!

  • Baron

    the Citibank graph cannot be right, the UK nonbank private sector (it must include insurance, pension funds and the like) doesn’t seem to register, yet the sector relies heavily on gilts, not only but mostly for pensions.

  • Mac

    The Spectator’s forecast record.

    1. Balancing the books thru cuts will stimulate the economy – WRONG

    2. Printing money is a short term and neccessary measure – WRONG

    3. We will not see a double-dip recession – WRONG

    4. Our triple AAA rating is secure – WRONG

    5. George Osborne knows what he is doing – WRONG

    6. There is no alternative to austerity measures – WRONG

    Do 6 wrongs make a right?

  • DavidDP

    Moody’s didn’t downgrade us. They put the UK on negative outlook, which means they think there’s a change (1 in 3) that they may downgrade us.

    As for the other European countries, they actually downgraded several, and a number more joined us on the negative outlook list.

    The innacuracy is rather astounding, Fraser.

  • pilsden

    Not sure where you get the idea Moodys didn’t downgrade other europeans from Bloomberg
    “Moody’s Investors Service cut the debt ratings of six European countries including Italy, Spain and Portugal and revised its outlook on the U.K.’s and France’s top Aaa ratings to “negative,” citing Europe’s debt crisis.”

  • Fraser

    In the real world a person or company whose habits are folly ultimately meet reality when they can no longer perpetuate their credit lines. This is what would have happened in the UK if the Bank of England hadn’t created the money to perpetuate the government’s inefficiencies. In 1976 the axe was forced to be swung because there was no alternative. QE is a disaster, not because of the inflationary risks it presents, but because it entrenches the last days of the Brown era when money was being sprayed around in a lunatic manner. The public sector won’t reform until there isn’t an alternative.

  • LondonStatto


    Read what they wrote.

    They’re warning against Balls’ policy not Osborne’s.

    And they haven’t downgraded the UK.

    Thus your argument fails completely.

  • Nickle

    Ah yes.

    The government doesn’t have to pay FPI.

    They won’t pay me my state pension

    They won’t pay civil servants their pensions.

    It’s not a debt according to your article.

    Get real.

    Debts do not mean the same thing as borrowing.

    The real debts in the UK are vast.

  • Jannie Geldenhuys

    Moody’s hasn’t downgraded the UK. it has put it on negative credit watch. Not the same thing at all.

  • Kittler

    What? What? the Italians at the bottom of the Government Net Debt table, this cannot be true, surely some mistake!!!

  • AR

    This is a circular argument: We have our AAA rating because we have an independent central bank are able to create sufficient additional reserves to manipulate the price. Most eurozone countries can’t, so don’t. QE is working as our cost of borrowing remains low.

  • tb

    Amazed at the fact Ball’s can complain about inheriting a bad situation…

    But then he’s pretty brazen with taking money from the taxpayer.

  • Bonzodog

    One slight problem with this article. Moody’s actually haven’t downgraded Britain just that we MAY be downgraded! That is rather different.

  • TomTom

    Moodys put Britain on Negative watch together with France, Austria, and 3 other countries. Britain is not growing so can never get out of the hole, but that is not a problem – everyone is being thrown overboard to save the banks

  • oldtimer

    The only question in my mind is this. What took them so long? UK government pronouncements on the deficit and the national debt exhibit, more and more, the characteristic of The Big Lie.

  • Heartless Curmudgeon

    ” Osborne can only get away with his proposed borrowing binge if he can think of some ideas for growing the economy ”

    Ooh that’s a toughy … plant more wind farms? … plant more fields of maize for eco-fuel? … turn remaining coal fired power stations into theme parks and museums? … increase immigration and the number of people on benefits? … never, of course, stop the wasteful merry-go-round and bring back sound money,

  • Bob Dixon

    The Government,The Banks,Business and the man in the street need to do the following.
    File for bankruptcy or the equivilent.All debts and assets are disposed of and on day one you start afresh.Or
    Arrange an IVA.70% of the debt is written off and the balance is paid off over 60 months.

  • toco

    Recessions end so this is all about keeping one’s nerve and the last thing we need is an even greater mountain of debt and escalating interesting rates which would only serve to stifle the recovery.The green shoots of recovery are already appearing particularly in the US so now is not the time to panic and change direction in the UK.Given Balls track record on the economy and his association with the likes of Damian McBride I see absolutely no reason to believe anything he says.

  • Jez

    I think we need more immigrants.

  • Russell

    GO should speed up the removal of 700,000 public sector employees. Even if every single one of them go on the ‘dole’, they will cost us (the private sector taxpayers) a lot less.
    As many will get employment in the private sector, they will then be paying genuine tax and NIC, contributing to the economy instead of costing the economy.
    The LibDems are right about raising the personal allowance quickly, putting more spending power into the hands of the low paid workers, and they will spend.

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