The news that Moody’s has downgraded the UK credit rating comes as a savage political blow to Osborne and Cameron, but the impact damage is political rather than actual. The markets expected it, government borrowing costs have been rising because of that, and both America and France have found business more or less as usual after their downgrades. This is due to the fact that all the borrowing nations of the West are battling varying degrees of debt difficulty; therefore Britain does not stand out as especially risky to those with cash. Moreover the ratings agencies, having called everything wrong before the crash, have a current problem with their own credibility and are not the benchmark they once were.
Politically it might not matter that much either but for one thing. Like the weapons of mass destruction which weren’t there (as many suspected) which were promoted as the reason for the attack on Iraq, so the coveted AAA rating was used by Osborne as the prize for the wisdom of his policy as well as the palliative for the hurt of the cuts. Not only has the policy failed to deliver growth but it has also failed to sustain the one tangible benefit Osborne made his policy’s raison d’etre. So where are we?
Clearly George Osborne is in a very bad place and Ed Balls is in a very good one, but that is not the real issue, unless you sit in the Commons for a Tory marginal. The issue is where is the economy going? Here the answer may in part be more positive than people think. It is true that the economy is, as Balls repeats across the media 24/7, ‘flat-lining’ . However that is not quite right. When the crash came, it came because every part of it was over borrowed and had built itself up on borrowed money. This applied to government, business and consumers. The net position was significantly less. Even taxes were being paid out of leveraged assets ‘releasing equity’, meaning borrowing more. The FSA should proscribe the use of this misleading term.
Now all that has changed. The economy is functioning on far less borrowing, people are living within their own reduced means and successful corporations, instead of being leveraged, are hoarding cash piles. Liquidations, administrations, debt repayment plans and personal bankruptcies are all clearing the decks and creating space for new opportunities and greater financial equilibrium. This is why unemployment is falling and a million new private sector jobs have been created; the opposite of what should be going on in a flat-ling economy, as baffled economists often remark. In truth the net economy is not only holding its own, but it is growing sufficiently to take up the slack.
Osborne and the Treasury have concentrated on two areas. The first is to shrink the state as an employer and the second to reduce the budget deficit. They have been successful with the first, which they describe as rebalancing the economy. They have failed in the second because they have not yet been able to generate growth above the level needed to take up the slack of the previous activity, which was not a reality but a founded on unsustainable debt. However the foundation for that to happen has now been laid. It has not been laid by the government or government agencies. It has been laid by industry and the people because of their hatred of the banks and a new refreshing distrust of borrowing. This is where the real re-balancing of the economy is happening.
What is no needed is a grand strategic economic plan to build upon this effort by the private sector and the people. There is no such plan in sight. Both Osborne in his budget and Balls in his response to it will come up with tinkering and marginal changes, but neither the government nor the opposition have shown any real grasp of what is happening where and what is needed from government to boost it. It looks as if it will be up to the people to go it alone. Not for the first time they may yet surprise themselves. They can be sure of one thing. If they succeed the politicians will take the credit.