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Over the past few years, the chancellor fetishised the protection of the AAA rating. He was wrong to do so
George Osborne cannot have it both ways about the downgrading by Moody's of the UK's government bond rating. Less than three months before he became chancellor, Mr Osborne said in his Mais lecture that Britain had to move to a new model of economic growth in order to avoid the peril of the downgrading of the UK economy by the credit rating agencies. He set out eight benchmarks "against which you will be able to judge whether a Conservative government is delivering on this new economic model". The very first of these benchmarks was unequivocal: "We will maintain Britain's AAA credit rating."
A few weeks later, Mr Osborne arrived at the Treasury, not as chancellor in a Conservative government as he had anticipated in the February 2010 lecture but as chancellor in a coalition government. But the agreement with the Liberal Democrats did not lead Mr Osborne to renege. In May 2010, speaking to the CBI dinner in his first major speech as chancellor, he promised a debt plan in the upcoming budget and spending review in which "safeguarding Britain's credit rating" would be a primary goal. Then, in his first party conference speech as chancellor in October that year, he mocked Labour for having put the UK's credit rating at risk for the first time in our history and boasted that, under the coalition, there was "no paralysing fear that our credit rating could be lost".
There are many criticisms that can and many caveats that should be made about the ratings agencies. The agencies are taken too seriously. They are players in the market as well as judges of the market. The different agencies don't always agree with each other. They sometimes have a lousy record, especially with the pre-bust banks, about whose prospects they were all wilfully bullish. They have downgraded other major economies, notably the US, too recklessly and in defiance of the facts. The arcane calibrations they employ, such as that between AAA and AA1, bear little relation to any meaningful distinctions in reality. In the real world, creditworthiness falls mainly into four categories – good risk, quite good risk, quite bad risk and bad risk. Most of the rest is simply mystification. Vince Cable was right to say on Sunday that credit ratings verdicts are largely symbolic.
If Mr Osborne had made some or all of these points over the past few years, he might have been intellectually entitled to dismiss the Moody's verdict in the same way that Mr Cable did. But Mr Osborne never even went close to embracing a more nuanced view. On the contrary, for political rather than economic reasons, he fetishised the elimination of the deficit and fetishised the protection of the AAA rating. He was wrong to do so. Like the credit ratings agencies themselves, he misread the economic signals, persuading himself that tight fiscal policy would succeed in a global environment in which most other large economies were tightening too. Now they are discovering they all got it wrong together. The current recession is different and deeper. As Moody's said last week, and as Mr Osborne will be forced to confirm in next month's budget, sluggish growth (ie no real growth) will continue until past 2015.
The bigger impact of the downgrade is likely to be not economic but political. Part of this, inevitably and rightly, is about Mr Osborne himself. Mr Osborne elevated the AAA rating into a test of his own economic policies. The test has been failed. Mr Osborne cannot therefore complain if he loses from it. He has allowed himself to become Norman Lamont to David Cameron's John Major and will have to take the consequences. But the larger failure is of the strategy over which Mr Osborne has presided. When all the obfuscation is cleared away, what Moody's was saying last week is that Britain is not in a strong enough position to go its own way in the world economy in the way the chancellor had hoped. Mr Osborne was not the only politician who got this wrong, and the Tories are not the only party that must face up to what this may mean for Britain.