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If Britain loses its AAA rating, Osborne will lose one of his key attack lines

6 December 2012

George Osborne’s admission that he will not meet his target to have debt as a percentage of GDP falling by 2015/16 has serious consequences for one of his central messages. The Autumn Statement has led credit ratings agency Fitch to warn of a possible downgrade. The agency said:

‘Missing the target weakens the credibility of the fiscal framework, which is one of the factors supporting the rating.’

Ratings agencies aren’t the be-all-and-end-all by any means, and Osborne could quite easily point to just how wrong they were before the crash, giving collateralised debt obligations high ratings. But the problem is that the Chancellor tends to wheel out their approval to shore up his own position, pointing to the UK’s AAA rating as a sign that he is pursuing the right economic policy. If Fitch does strip Britain of its AAA rating, it will mean the Chancellor will have to change his message. He was quizzed about this on BBC Breakfast this morning, and said:

‘We’re borrowing money at the moment at some of the lowest interest rates in British history, because when people look around the world, and they look at countries to invest in, they think Britain is a good investment. So look, the credit rating is important and the market is important, and the reason why this matters to people watching this programme is because if you don’t have credibility, if you’re not able to show the world that you can pay your way, then interest rates go up for the Government – that means taxpayers have to pay more to fund the debt – but also interest rates in the economy go up, mortgages go up, small business rates go up, and one of the things we’ve been able to do as a government is keep those rates very low because the world has confidence in us.’

Expect more damage limitation exercises like the one attempted by Danny Alexander in August, in which Treasury ministers suddenly discover a new cynicism about the verdicts delivered by Fitch and other organisations.

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  • mikewaller

    Had the Tories played there cards right, the loss of the Triple A could have been (correctly) presented as yet more evidence of the massive hole into which post-war politicians of all stripes plus the myopic electorate have dug us. However the key to this was maintaining faith with the LDs and projecting the Coalition as something which had to last at least two parliaments if the huge damage done were to be anything like undone.

    Instead, their emotional immaturity is such that many Tory MPs have treated the coalition as an annoyance which should be done way with as soon as possible. In this scenario the LDs are dumped in the dustbin of history in the context of a happy return to two party politics with the Conservatives in power more than they are out of it. This. of course, is a fantasy of the wildest kind but has very much opened the door to a resurgent Labour party. After all, if the Tories don’t think things are sufficiently bad as to warrant the maintanance of the Coalition – itself the most powerful evidence that things are dire – why should an electorate desperate to get back to happier times not vote for a good old “spend, spend, spend” Labour government? Much as politicians + electorate blew the North Sea oil money, the same sorry combination is going to blow our one best chance of working out way out of this God awful mess.

  • TomTom

    You forget that Sovereign Debt Status is propping up Lloyds and RBS and the commercial property market. It is Sovereign Debt that is benchmarking the Debt of Zombie Banks and their huge Commercial Property exposure – think Tchenguiz et al and Kauptring and the whole edifice of HBOS Commercial Property plus RBS plus Barclays plus Northern Crock and HSBC. There is much more than Gilts riding on that Bond Rating…..there is Britain’s very own ESM and EFSF.

  • RationalSpeculation

    I think most of the government’s problems can be laid at the door of Osborne and his lack of understanding of modern markets. He obviously based his whole strategy on a reasonably optimistic forecast of the world economy (not that there were not more pessimitic forecasts out there) and, having failed to leave himself any wiggle room, has to undergo the periodic embarassment of admitting that he got it wrong. Had he realised that a forecast is merely a guess, rather than holy writ, he might have left himself, and the government more space.

    Sadly, he does not seemed to have learned his lesson, and now clings to the AAA rating and low gilt yields. He might be less keen to do so if he realised that a) ratings agencies are allowed to change their minds (ask France) and b) the fact that the Bank of England now owns 25% of the gilt stock might have had a teensy impact on yields. Maybe if he did understand these things, he might avoid his almost inevitable fate of having to explain why we’ve been downgraded and why bond yields are rising as investors who are only allowed to hold AAA-rated paper are forced to sell.

    I’m sure he’s a very nice chap but he increasingly reminds me of a former assistant of mine. Very good at throwing buzzwords around but on the slightest questioning, he would reveal that he was utterly clueless.

    • TomTom

      It was obvious in 2008 that no matter what caused the Downturn the way Brown caved in and gave the banks everything after Shriti Vadera showed him what bankers wanted – is what has prolonged this Downturn unnecessarily

  • anyfool

    Triple A ratings have been devalued earlier by others earlier saying Osborne should ignore them so he could cut less, so why would it matter politically now.

  • dalai guevara

    I am reliably informed by Mr Oxford that there is a difference between the words ‘if’ and ‘when’. Surely ‘when’ is more appropriate?


    I myself spend a large part of my time monitoring this blog and the Euzozone Crisis live blogs (THERE’S ONE EVERY DAY. WHY IS THAT?) , but I think that one can get too involved in the minutiae. There is an article in Guardian by M. Kettle in which he points out FOUR arguments that Mr Osborne is using his decisions to make and I am confident that he will be able to make ALL of them convincingly in 2015.
    Labour have created a problem for themselves by electing a leader so that Brown’s Gang of Three + one of their wives are Leader, Shadow Chancellor , Home Secretary and Foreign Secretary – the four GREAT offices of state.

  • FirstPassThePostStinks

    George Osborne needs a Hollywood make over, so here goes:

    “Osborne is quietly pruning the waste and decadence from the powerful British economic model. As Montgomery once did on the eve of battle with Rommel in the vast deserts of North Africa, Osborne discreetly builds up secret reserves of capital ready to be unleashed across the global market. With the support of British industrial titans, the captains of some of the worlds most advanced capitalist, predatory institutions, we can see the long awaited successful economic front breaking out very soon”

  • Tom Paine

    Cutting benefits is good start. The elephant in the room is housing benefit which (by its very nature of being based on local averages) just keeps going up and up.

    It’s already bigger than the entire Higher Educaction budget – what a warped sense of priorities – and the bulk of it goes into the pockets of private landlords, with all sorts of bad effects on encouraging malinvestment in property rather than in the productive sectors of society, piricing out first time buyers, and so on.

    It can’t be beyond the wit of man to take an axe to that – changing the system by which it’s calculated, lower celilings on what will be paid for each property category, and most importantly taxing empty property so that it comes into use or gets sold to someone who will put it to use.

    Combine that with some judicious capital spending on social housing (good for economic activity) and fewer tax breaks for BTL speculators (hardly the most popular group in society) and it sounds like a sensible plan, not to mention a vote winner.

    How hard can it be?

    • HooksLaw

      Very hard when you get the BBC, cheered on by Labour, accusing you of shafting the poor.

      My understanding is that the Housing Benefits bill is £23 billion
      The entire Education budget is £92 billion. I am not sure that picking any one element of that (and 53 billion cannot be ‘definable by any level’) has any point.

    • Nick Reid

      Not sure why you are complaining about “private landlords”. Someone has to own the houses. If it isn’t private landlords then it is state landlords.

      But the cost of housing remains pretty much the same. The private sector supplies (approx) £300bn of housing which it rents out. The alternative is for the government to borrow £300bn to supply the same amount of housing. And on which it has to pay interest charges, and/or tax us all more.

      • Tom Paine

        Don’t be daft man, the cost of state-run social housing is a fraction of the cost of placing people with private landlords. Compare the average local authority rent with private sector it’s between one third and one half cheaper. Agreed borrowing would be needed to build more social housing but it could be done for a fraction of the cost the private sector would charge to provide it over an extended period.

        In any case if state support for house prices (in the form of over-generous Housing Benefit) were to cease, house price and rents would fall (or at least, not rise above inflation as the have been doing). Virtuous circle.

        The Tories used to get the importance of social housing but while the Thatcher sell-off had its merits in terms of individual empowermnet, its privatisation has been catastrophic in the long-term for the public finances.

        • Nick Reid

          The reason why state housing rents are cheaper is because they are subsidised. Nothing wrong in that but it is a cost. The tax payer still pays either through higher taxes or higher interest payments on greater government borrowing.

          There is an opportunity cost to holding government assets that don’t produce a market return (like “cheap” council housing) when at the same time you are having to run an £800bn national debt paying market interest rates.

          • Thomas Paine

            This is nonsense, the inefficiencies of outsourcing social housing to a multitude of Rigsbys are legion, the impact over 30 years on the economy have been catastrophic to say nothing of the social impacts of falling home ownership rates and higher rents and house prices, which all go to reduce citizens’ spending power on real things (as opposed to feeding the banks) and reducing UK competitiveness.

            I’m guessing you are a bit of a Rigsby yourself, no?

          • dalai guevara

            The profit element is removed in an area where profits should not be privatised. It’s -as always- as simple as that.

    • Dimoto

      I have just read Roger Bootle’s piece on the Autumn statement – you sound a bit like him. He castigates Osborne for the trivial cut to benefits, “achieved after a mighty struggle within the coalition”.
      Both he and you, should remember that this is ‘POLITICAL economy’. The LibDems are vehemently opposed to benefit cuts and always demand damaging quid pro quos, and the wider electorate will only accept so much (very little).
      You can argue that the Tories didn’t make their argument well enough in 2009/10, but that is water under the bridge. It is the easiest thing in the world to come up with a list of “what should be done”, if you ignore reality and democracy (like Bootle).
      Apparently Labour will, predictably, oppose the 1% cap.

      News today is that the trade deficit has grown and that car sales in the UK are rising and strong. We will buy more cars this year than Germany. It suggests that the (import loving) Brit consumer is feeling perky – Ford (you know, that company that has been slowly disinvesting from Britain for decades), is again the largest seller, The (heavily investing) Jaguar-Land Rover and Honda are way down with the also-rans.
      If you believe in free trade, you need to grin and bear it. The Brit electorate/consumers are expert at self harm.

  • HooksLaw

    Fitch ans others can say what they like, but its not just a question of missing a target – its why and what is the consequence. The target has not been thrown away, the endeavour is still there to meet it.

    I am not sure if some countries, like say France, have any target at all. All of Europe’s growth rates have been lowered.

  • LB

    Doesn’t matter.

    No one is buying Gilts anyway.

    345 bn of 375 QE has gone on Gilts.

    Borrowing over the same period? About 345 bn

    • HooksLaw

      So if the govt is not paying to borrow but just printing, then the amount it pays for debt should not increase?

    • Nick Reid

      10 year gilts are currently yielding 1.79% so pretty clear no one selling them either.

      • HooksLaw

        if the govt is not selling gilts then it is not borrowing – so how come borrowing is rising? How come the interest we pay on debt is rising?

        • dalai guevara

          OMG! Hook pretending to be an economist…

  • swatantra

    Tip for George: ‘We may lose our AAA Status, but it doesn’t mean that the £ in your pocket will be devalued ….’
    The fact is many other countries are losing or have already lost their AAA.
    Its all relative and you have to take these things with a pinch of salt.

    • George_Arseborne

      Ah!!!!!, This was the Tory talk when they started governing. Now that all their policies are in tatters ( Borrowing up, no growth but shrinking economics, mountain of depth etc) Oh!!!! it does not matters. We know you hypocrite . He will be drawn if that rating is strip.

      The people are not that foolish as thought. UK has an independent Monetary System which allow the treasury to manipulate currency in the name of quantitative easing by the bank of England. So triple A or not borrowing level will still be low. Take example of USA and France, they are even borrowing at a lower rate than when they have their so called Triple A rating.

      The only market slave and dummy is the gloomy George Osborne

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