You know that on the one hand the news that broke on Friday night about Moody’s downgrading their credit rating for the UK from AAA (With Standard & Poor and Fitch expected to follow) should mean not very much in the short term for the UK. Higher borrowing & prices will eventually filter into the UK economy.
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| Gideon going through his times tables... once again! |
Of course, the
problem for Gideon Osborne and the coalition is that they have placed so much
stock in protecting the UK’s
AAA credit status.
Indeed, not only
was protecting Britain’s AAA status the cover for Osborne’s “Scorched earth”
policy, but as the man himself pointed out at the last Westminster Election – “We
will safeguard Britain’s credit rating with a credible plan to eliminate the
bulk of the structural deficit over a Parliament.” – this was an election
pledge. Still, that’s what happens when you jump into bed with the Lib Dem’s.
So where does this
leave Gideon? Osborne must now be under immense pressure to pull something out
of the hat in next months Budget. As I’ve pointed out before, Osborne’s
problems stem from his lack of understanding that taking money out of a
contracting economy will only hinder any recovery… if there is one. His
inflexibility regarding “Austerity” is even more marked given the plethora of
u-turns performed by this government since election. Osborne himself
contributing to that list with last years botched attempt at a budget.
The good news for
Osborne is that his shadow, Ed Balls, has similarly misdiagnosed the issues
within the UK
economy. Balls has urged a sort of dash for growth, not knowing that growth is
but a symptom. The real issue is that since 2007 there has been a chronic lack
of the movement of money – there is very little liquidity in the economy.
The lack of
liquidity in the economy was what started the event that brought about the
current crash – the credit crunch. Banks
were not lending to each other, so were forcing each other to the bank of last
resort. Even Barclays (who’s name was
strangely missing from Robert Peston’s report on Northern Rock). Since then,
the liquid economy at large has dried up.
Tighter credit controls, higher fuel prices and stagnating wages have
all played a price in the lack of the movement in our money. It’s no coincidence after all that HMV, Jessop’s
and Comet did not have the most competitive of pricing strategies. So where should politicians be looking for
ideas to get the economy moving?
Labour’s policy at
the moment is for a cut in VAT. The
problem here is that VAT is a tax on spending, which is useless when there is
very little spending. The best way out
of that cul-de-sac is a continuation of the raising of the tax threshold – the
only good thing to come out of the coalition.
Putting money into the low paid
will have two effects.
Firstly, because
the low paid live a more hand to mouth existence, that extra money will be
spent, creating a bottom up stimulus to the economy. Secondly, that money will find its way back
to the treasury. Low paid workers tend
to buy goods that are taxed – either through duty (cigarettes & alcohol) or
through VAT.
While it’s OK (for
the moment) for Balls & co to get things wrong (they are still only the
opposition, though they really should be striving to look more like a
government in waiting at this point), things are a lot more difficult for
Osborne. Balls referenced John Smith’s
description of John Major (a “devalued
prime minister of a devalued government”) when he taunted Osborne with the
line about being a “devalued Chancellor”. Last year saw the shredding of Osborne’s
(fledgling, but frankly overrated) reputation as a political operator. So far this year, we are seeing Osborne
become the worst chancellor in living memory.
Gordon Brown might have sold our gold reserves and reinvented Lazes
Faire as “Light Touch”, but at least he wasn’t dumb enough to pin his
reputation on something always likely to happen.
After all, what was
it Brown said about this being no time for a novice…
