Britain must stick to tough love

How cruel. Moody’s is threatening to dump Britain’s triple-A rating.

Its justification — “materially weaker growth prospects” — has been seized by the government’s opponents to attack spending cuts. But the warning from Moody’s is in reality a Valentine to austerity. George Osborne, the chancellor, really does need to continue his policy of tough love.

Britain’s big problem is that its fiscal deficit, at over 8% of GDP, is double the average for the euro area. Only Greece and Ireland have a bigger gap. That government cuts have wounded growth in the short term is true. But how much deficit-spending do critics want? This year, if the cuts go according to plan, the government will still spend £120bn (€144.4bn) more than it takes in taxes. That would normally be considered pump-priming on a heroic scale.

The risk is that if the huge deficit is not brought down fast, government debt will become problematic. At present it amounts to 64% of GDP which, at half Italy’s level, looks rather good. But the Office for Budget Responsibility forecasts a rise in the debt to GDP ratio to 94% in 2014-2015, even if the government sticks to its policies.

The real dilemma would come if cuts were to send Britain into deep recession. Fortunately, that doesn’t seem likely. The prospect is for a pick-up in growth this year. An easing of inflation, down to 3.6% in January from 4.2% in December, will help. Britons’ earnings are not set to be eroded as swiftly as before.

Moody’s growth warning may be overdone. And provided the government sticks to the task of aggressively reducing its deficit — so-called “Plan A” — the country will remain highly credit-worthy. That is how the markets, buying British 10-year bonds for a yield of just 2.2%, see it for now.

Of course, the Bank of England’s abundant money printing and debt purchases are a factor in those low yields. But they wouldn’t stay low if markets saw the government unveiling a cuddlier side.

Outlook negative

Moody’s has changed the outlook on Britain’s triple-A government bond rating to negative from stable.

The rating agency warned that the pace of fiscal consolidation risked being affected by “materially weaker growth prospects over the next few years, with risks skewed to the downside.” This called into question the government’s ability to put its debt on a downwardtrajectory by the 2015-16 fiscal year.

Moody’s also said that though Britain is outside the eurozone, there was a “high risk of further shocks” to Britain emanating from the currency union.