A-A-Another one bites the dust

The reality of Britain’s credit downgrade is likely to prove less dramatic than the anticipation. It had been widely expected that the UK would be stripped of its AAA rating in the next few weeks. The only surprise is that Moody’s took the decision before the Budget in March. The insouciance of investors when France and the US lost their top ratings suggests the market reaction may be more a shrug than a shudder.

Politically it is highly significant, however, not least because George Osborne said that retaining Britain’s AAA rating would be a key benchmark of the success of his deficit reduction strategy. Some of his critics, including the Shadow Chancellor, Ed Balls, claim that losing the rating demonstrates that the strategy has failed and that he should change tack. But this newspaper believes the problem is not that the strategy laid out by the coalition in 2010 was wrong. It is that the government has failed to implement that strategy with sufficient vigour and political courage.

Mr Osborne was absolutely right that the priority was a credible plan to reduce the government deficit and that this should be achieved mainly by cuts in public spending rather than tax increases. This would form part of a longer-term shift away from a high-spending state to a low-tax economy with room for the private sector to thrive freed from unnecessary regulation. Helped by the fall in the pound, there would be a rebalancing of the economy towards exports and the regions and away from an overheated City and the rest of the south east.

The reasons that the progress made so far has been disappointing lie to a large extent outside the government’s control. Growth has failed to recover as strongly as hoped partly because exports have been hit by the crisis in the eurozone. Meanwhile the fall in sterling fuelled inflation, which put consumer spending under pressure.

Counterpoint

Hoist by his own petard

George Osborne, the UK chancellor of the Exchequer, had vowed that under the coalition there would be "no paralysing fear that our credit rating could be lost," recalls The Guardian. In an editorial, the left-wing daily notes that –

Mr Osborne elevated the AAA rating into a test of his own economic policies. The test has been failed. But the larger failure is of the strategy over which Mr Osborne has presided. When all the obfuscation is cleared away, what Moody's was saying last week is that Britain is not in a strong enough position to go its own way in the world economy in the way the chancellor had hoped. Mr Osborne was not the only politician who got this wrong, and the Tories are not the only party that must face up to what this may mean for Britain.