The UK has been put on a credit-rating downgrade watch. This is not surprising, but one wonders whether Moody’s is focusing on the right issues. In particular, Moody’s cited the lack of growth and the troubles in the eurozone as being the main reasons for its decision. Moody’s fears that the lack of growth could come from further problems in the banking sector, very weak growth in Europe and continued private-sector deleveraging. Leaving aside the fact that it is rather strange to suggest that deleveraging (and the consequent increase in saving) could cause slow growth and a debt crisis in an open economy (a decent third-year undergraduate course on international financial economics would put Moody’s right here) these are relatively short-term issues. What of the long term?
George Osborne’s plan is to bring the government finances back into balance in the medium term and reduce government spending to just below 40% of national income. This is very worrying. By the Chancellor’s own admission, the UK government has never been able to tax its citizens more than 40% of national income. The limit of the ambitions of a Conservative Chancellor of the Exchequer appears to be to tax the British population at the maximum taxable capacity.
If we fast-forward to 2016 and assume that the government has been successful in reducing government spending to its target, then what? The likelihood is that the government will be locked into a 40 year battle just to keep spending at that level. Calculations from IEA authors about the true underlying size of UK debt caused alarm when they were first published four years ago. Now, using somewhat different methods of presentation, the Office for Budget Responsibility produces its own forecasts of the long-term pressure on government spending. They too make depressing reading.
Read the rest of the article on ConservativeHome.