Let’s put Louise Mensch, Boris and Nigel Farage aside for a moment — the most significant political news of the day may have come from the mouth of a Lib Dem. Discussing the prospect of the UK losing its AAA rating on the Today Programme earlier, Danny Alexander said that “the credit rating is not the be-all and end-all”. He did add that the judgements of the rating agencies are “a reflection of the credibility” of the government’s economic policy, but, still, it’s that “not the be-all and end-all” line that stands out.
This is significant because it goes against the flow of the government’s message for the past couple of years. George Osborne, in particular, has placed great emphasis on us retaining our triple-A rating. It was only a week ago that he was saying, for the thousandth time, that our untarnished rating shows that “the world has confidence” in Britain. What’s more, even his fiscal rule to have national debt growing no faster than the economy by the end of this Parliament was shaped by the demands of the credit rating agencies. Standard & Poor’s warned Alistair Darling in 2010 that he would need to put debt on a similar trajectory if a new Labour government were to avoid a downgrade.
But now — thanks to our stuttering economy and its side effects, such as weak tax revenues — it looks as though that fiscal rule might be broken. This would be embarrassing for Osborne in itself, but it would be even worse were it inspire a downgrade. By placing up our triple-A rating on a pedestal, the Chancellor has made himself a hostage to fortune. The credit rating agencies can upset his argument as easily as he built it up.
Hence, I suspect, why Mr Alexander is now downplaying the significance of our credit rating. It’s to soften us up for the event of us actually losing it. But the Treasury does have one solace here: that there is actually proof that credit ratings aren’t the be-all and end-all. A study by Bloomberg showed that, “in about 47 per cent of cases, countries’ borrowing costs fall when a rating action suggests they should climb, or they increase even as a change signals a decline.” A lot of economists put this down to the state of the global economy as a whole. When everywhere is doing badly, investors won’t suddenly rush to sink their money into another country’s debt. Countries like America and, one expects, Britain are still trusted to pay back what they owe, whether their credit rating is downgraded or not.
In the end, George Osborne still faces the same choice that I mentioned in a column for the Times (£) last year: does he risk losing our triple-A rating, with all the fallout that could come from that, or does he implement more austerity to keep the rating agencies at bay? The only thing that could save him from either option is more growth — but that looks a distant prospect at the moment.