Sterling is expected to come under strong pressure on international financial markets today, following the decision by ratings agency Moody’s to downgrade the UK’s triple-A rating for the first time in 25 years.
However, the cost of servicing the UK’s £1 trillion national debt is not expected to rise significantly, but only because a third of it is now held by Bank of England, which will not be selling.
Moody’s downgrade was not a surprise, although its decision to do so downgrade before next month’s budget is a clear illustration that it has little faith in the chancellor of the exchequer, George Osborne’s ability to increase growth rates.
Politically, the loss of the AAA rating is a major blow for Osborne, who said frequently its retention was necessary to reduce borrowing costs, curb inflation and keep interest rates down.
Beset by problems on all sides, Osborne faces the danger of higher inflation, particularly in dollar-dominated energy prices – which will exacerbate mounting anger about ever-higher fuel prices for motorists.
Senior Conservatives sought yesterday to row in behind Osborne, who once held near-mythical status with the party’s MPs for his strategic abilities but increasingly faces questions about his political future.
Meanwhile, Liberal Democrats business secretary Vince Cable questioned the rating agencies’s record. “[They] actually have a pretty bad record, they’re a bit like tipsters, they get some things right, a lot of things not right. They are part of the background noise.”
Deficit plans
He insisted that the British government would continue with its deficit plans – which have so far cut public spending by 3 per cent, though Conservative MPs are likely to increase pressure for accelerated cuts, even though a general election is just two years away.
“I think to embark on a slash-and-burn policy in response to this would be utterly foolish and counterproductive and I’m sure we will not be going there and what I’m concentrating on in my job in government is on the factors that create real, substantial, long-term growth,” said Cable.
Following several years in which sterling’s value against other currencies increased as London was seen as a safe haven, the currency has come under pressure in recent months, losing nearly 7 per cent of its value since September.
Moody’s decision will increase pressure on Osborne to come up with budget measures to boost economic growth. His options are limited, however, as increased borrowing would frighten the markets further.
“I think the thing that will steady the currency markets as far as we’re concerned is a reaffirmation that we are determined to continue on probably another few years of deficit and debt reduction,” said minister without portfolio Kenneth Clarke.
Series of measures
Saying “you can get nowhere with a burden of debt on your back”, Clarke said the government has taken a series of measures to boost training skills, restore credit for business and invest in infrastructure.
Former Labour chancellor Alistair Darling said Mr Osborne’s original plan to eliminate the deficit by 2015 was “wildly optimistic”, while he is now borrowing £200 billion more than he said he would.
“That’s why people are taking a dim view of us and that’s why I think there are many people who now say: ‘You have to change tack; you have to recognise that a plan to try and slash and burn your way out of this simply will not work’, said Darling.
