Moody’s shows UK needs more austerity, not less
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
How cruel. Moodyâs is threatening to dump the UKâs triple-A rating. Its justification â âmaterially weaker growth prospectsâ â has been seized by the governmentâs opponents to attack spending cuts. But Moodyâs warning is in reality a Valentine to austerity. George Osborne, the UK Chancellor, really does need to continue his policy of tough love.
The UKâs big problem, half forgotten amid the euro crisis, is that its fiscal deficit, at over 8 percent of GDP, is double the average for the euro area, where 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 the critics want? This year, if the cuts go according to plan, the government will still spend 120 billion pounds more than it takes in taxes. That would normally be considered pump-priming on a heroic scale.
The risk for the UK is that if the huge deficit is not brought down fast, government debt will become problematic. At present it amounts to 64 percent of GDP which, at half Italyâs level, looks rather good. But the Office for Budget Responsibility, the governmentâs fiscal watchdog, forecasts a rise in the debt to GDP ratio to 78 percent in 2014-15, even if the government sticks to its policies.
The real policy dilemma would come if cuts were to send the UK into deep recession â as has happened in the euro zone periphery. But fortunately that doesnât seem likely. Current data point to stabilisation. The prospect is for a pickup in growth later this year. An easing of inflation, down to 3.6 percent in January from 4.2 percent in December, will help. Britonsâ earnings are not set to be eroded as swiftly as before.
Moodyâs growth warning may be overdone. And provided the government sticks to the task of aggressively reducing its deficit â so-called âPlan Aâ â the country will remain highly creditworthy. That is how the markets, buying UK 10-year bonds for a yield of just 2.2 percent, see it for now. Of course, the Bank of Englandâs abundant money printing and debt purchases are a factor in those low yields. But they wouldnât stay low if markets saw the government unveiling a cuddlier side.