by Observer Editorial
February 25, 2013 (TSR) – For more than three years, the maintenance of Britain’s AAA credit rating has been the explicit and totemic aim of economic policy. All the privations that Britain is suffering – its reduced armed forces, its roll-back of support for the needy, the cancelled projects to build roads, schools and hospitals, with much more to come – were all vital sacrifices, we were told, to sustain the low interest rates that come with a AAA credit rating. The shrinking of the “bloated” state and thus our debts would be the catalyst for recovery.
This has been the mantra of not only George Osborne and the Conservatives, but their coalition partners and a whole gallery of cheerleaders including the Bank of England, the CBI, prominent business leaders, the bulk of the City and mainstream economic opinion. Now the credit rating agency Moody’s has said that Britain no longer has AAA status. Britain’s debts are too high and the prospect is for a prolonged period of subdued growth. The chancellor and his cheerleaders have led the country up a blind alley.
There will be a concerted effort to argue it does not matter much: after all, both the US and France have suffered a similar downgrading. But those downgrades were well-deserved. Despite the US being the largest economy in the world, the credit rating agencies correctly diagnosed its unyielding political gridlock as a serious menace to its ability to solve its fiscal problems. They were surely right. Equally, France is in a worrying economic position. Its economy stagnates while its external and internal debts explode. Some regard it as a basket case. A downgrade cannot be so simply shrugged off. It matters – spelling out how international economic opinion rates an economy. It is not often wrong.
This should be the trigger for a reassessment of economic policy, if not by the chancellor then certainly by everyone else. Osborne’s reaction – that the downgrade only reinforces the necessity for not changing course – is the cry of the embattled but soon to be engulfed British chancellor over the decades. To insist there is no change of course is the precursor to loss of office.
That is not to argue that a change of course is easy. There is no simple way to fix the banks, reduce the overhang of private debt, create genuine entrepreneurialism, unleash vitally needed investment and innovation, create a dynamic export sector and lift demand. We do know that the simple Osborne strategy – to try to eliminate the public structural deficit in four years as the catalyst to a private sector revival – is wholly misconceived. It has meant three years of stagnation, little inroad in lowering public borrowing because of the induced economic weakness and the loss of the very credit rating it was meant to preserve. But that does not mean the deficit can be ignored or that a misunderstood bastard Keynesianism of “pump priming” will offer a simple magic bullet alternative.
What is required is a multi-pronged approach. The precondition is a much more flexible strategy to lowering the public deficit than that signalled by Osborne – matching the flexible approach to lowering inflation now adopted by the Bank of England. There should be a multibillion, multi-year programme of capital spending increases aimed at boosting demand. The government should adopt a target that combines both growth and inflation and work closely with the Bank of England to achieve it.
There also needs to be wholesale reform of company structures. Last week, BAE Systems returned £1bn to its shareholders following Centrica’s decision to return £600m to its shareholders. It is incredible that neither firm believes they can invest this money to support growth and employment. If Centrica believed in British energy policy, it would surely have committed those funds to building new nuclear power stations rather than pulling out of its joint venture with EDF, an energy policy compromised by Osborne’s refusal to offer the framework necessary for long-term investment. That needs fixing, along with reform of the public limited company, so that directors have more committed shareholders as the platform for private long-term investment and innovation.
Banks have to be offered the carrot of guarantees and the stick of public ownership to raise their lending game. There needs to be a skills mobilisation. There needs to be a clear identification of sectors that will lead to growth – life sciences, transport, space, value-added cars and aircraft – and public money put behind them. Above all, there needs to be energy, ambition and ideas. Moody’s downgrade dramatises the urgent need for change.
This commentary appeared in The Guardian.