The Downgraded Chancellor

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.

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…