Credit rating agencies give the UK a one in three chance of a credit downgrade. James Meadway argues that despite Osborne's spin, its further evidence that austerity can't work.
George Osborne versus the credit ratings agencies. It’s a shame they can’t both lose, but in the meantime the rest of us – the real losers in all of this – might take some small pleasure in watching our esteemed Chancellor squirm like a trapped weasel. Much of what Moody’s says is a blunt statement of the unpleasant facts. The UK has “materially weaker growth prospects over the next few years”. It is being dragged into the euro car crash by its “trade and financial links” to the eurozone. They are, as a result, putting the UK on a negative warning – not a downgrade, but the possibility of a downgrade in the future.
When, under Labour, the credit ratings agencies put the UK on a negative watch, Osborne was damning. There could be, he forthrightly declared, no clearer indictment of Labour’s failed policies. Moody’s negative watch this time is taken by Osborne as mere further confirmation of his wise economic stewardship. But of course: who could doubt the brilliance of a Chancellor who staked everything on his ability to reduce borrowing and promote growth, now borrowing £150bn more than planned and watching growth collapse?
We should be clear about this. The biggest single reason we are heading back into a recession resides at Number 11. By committing to public spending cuts, Osborne is committing to stagnation. There is a simple mechanism at work: cuts reduce demand. Falling demand means falling sales for firms. Falling sales mean cuts to investment and wages. The recession worsens.
This is macroeconomic ABC – known since at least the 1930s. It is the death spiral that helped define the Great Depression. It’s now kicking in for the UK. As the economy declines, the debt burden swells. Osborne appears blissfully ignorant of this. He is a skilful politician. But he’s an economic illiterate.
Much of what Chancellor Osborne claims about the world is a species of fairy story. Interest rates on government borrowing aren’t low because of his austerity measures. They’re low because the Bank of England is using quantitative easing to buy up huge volumes of government debt, pushing rates down.
Public debts are no barrier to growth. Carmen Reinhart and Kenneth Rogoff, studying a range of countries over 150 years, found that there was no relationship between debt and growth – at least up until debts reaching 90 per cent of GDP. The UK’s most sustained period of economic growth, over the post-war boom, was a period of exceptionally high public debt.
The crisis of debts and deficits isn’t the result of a previous government’s profligacy. New Labour spent less on average, as a proportion of GDP, than did the Conservative governments of John Major and Margaret Thatcher. To blame the current debt and deficit crisis on excessive public spending is risible. Debts and deficits rose after 2008 because the financial system crashed and we entered a sharp recession. You don’t get a financial crash because you built too many hospitals, or paid for too many teachers. You get a financial crash because your financial system is screwed. And in spectacular, epoch-defining style, the UK’s financial system was.
It still is. In no sense has the City been reformed. Defrocking the odd knight of the realm scarcely registers. The City has, if anything, grown more obscene. When the financial system collapsed last time, it was bailed out: an immense volume of public support and public borrowing was mobilised to prevent its disintegration.
That support and borrowing now establish the crisis we are in. Because the City has not been broken, it continues to fester. Between 2002 and 2008, during the good times, the UK financial services industry paid £193bn in taxes. In 2008, when the collapse came, £298bn of government borrowing was immediately handed over. In total, £1,200bn of public money has been pledged in support for the spivs.
There is simply no other way to describe this than parasitism. It costs more to keep the City than it ever provides or can provide to the rest of society. If families are being forced out of their homes, or former soldiers driven by poverty to suicide, it is because we are paying for the corporate scroungers in the Square Mile. And for as long as we privilege repaying the debt over public services and real economic activity, we will continue to do little more than pour public resources down the gullet of a grotesque parasite.
And the more we attempt to cut, feeding this creature, the worse the economy will become. A complete reverse of current policy is needed, with no return to the old high-debt, high-carbon economy. Stop the cuts. Invest now to create decent, sustainable employment.
A senior economist at the New Economics Foundation, James Meadway has been an important critic of austerity-economics and and at the forefront efforts to promulgate an alternative. A recent author of The Good Jobs Plan – setting out an industrial strategy for Britain based upon social justice, and environmental sustainability.