The announcement that credit ratings agency Moody’s has downgraded the UK’s credit rating from AAA to AA1 has caused something of a political storm. George Osborne has repeatedly described the UK’s AAA credit rating as totemic, a touchstone by which his performance as Chancellor should be measured. It is difficult to avoid seeing it as the Gold Standard of our time; its loss is a major embarrassment for the Coalition, and some voices are arguing that for Osborne as Chancellor, it should be terminal. Even his traditional media supporters are after his blood.
Its economic significance is less clear. Evidence that Coalition economic policy is failing on its own terms has not exactly been hard to find – an economy that remains in recession (the so-called triple dip really being a function of the fact that the once-in-a-lifetime Olympics gave a mild boost) and rising borrowing from a Government that rationalises taking vast quantities of demand out of the economy in the name of debt reduction. At one level the downgrade is simply a statement of the bleeding obvious.
Moreover, one definition of a credit ratings agency might be an organisation that gave Lehmann Brothers an AAA rating on the eve of its collapse: I’ve blogged elsewhere about the catastrophic failures of ratings agencies. In terms of the real economy, this downgrade seems likely to make little difference – it was not exactly a surprise and markets are likely to have priced it in already.
Politically it is important because it exposes the real austerity agenda – which is ideological rather than economic. It is about the transfer of wealth away from wage-earners to holders of assets – a process that has been under way for many years but, in the UK, is accelerating dramatically as real wages fall; about shrinking the state and reducing the “burden” of welfare. Osborne has already claimed that this downgrade shows that the Government needs to continue on the same course; one conclusion from the downgrade – no doubt shared by many in the City and the Conservative Party and in economic think-tanks – is that the UK needs to cut harder and faster. The impact of this downgrade really lies not in the economics but in the political reaction; Osborne’s is to brush off his humiliation and to continue the project.
And where does this leave Ed Balls? Labour remains deeply conflicted – on the one hand bemoaning the economic effects of austerity, but on the other wedded firmly to an austerity agenda, with Balls vowing to keep the Coalition cuts and – potentially – to add more of his own. As I’ve argued before, Labour’s One Nation trope is strenuously avoiding engaging with economic issues at all. Rationally, the Moody’s downgrade makes Labour’s precarious seat on the economic policy fence appear even less tenable. The commentariat might want to reflect that the political fallout from this downgrade damages Balls as much as it does Osborne.
In other words, this is about politics. It’s one more piece of evidence – and in the context not a particularly significant one – that austerity is failing on its own terms; but the political agenda remains unchanged.