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Moody’s review shows need for ‘radical’ policies, economist
Ratings agency warning seen as proof that fiscal easing will “inevitably” increase the risk of a downgrade.
The recent move by ratings agency Moody’s to put the UK credit rating on review highlights the need for “radical” growth policies from the government, including further deregulation and reductions to business taxes funded out of public spending cuts, according to one economist.
Ruth Lea, economic adviser to the Arbuthnot Banking Group, said Moody’s change of Britain’s credit outlook from stable to negative implies that Britain has a one in three chance of a formal downgrade of its coveted triple-A credit rating over the next 12-18 months.
Moody’s stated that the key drivers of the reassessment were the increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks “skewed to the downside”.
It claimed that any further abrupt economic or fiscal deterioration would put into question the government’s ability to place the debt burden on a downward trajectory by 2015-2016.
Although the UK is outside the euro area, Moody’s also said the high risk of further shocks within the currency union were exerting negative pressure on the UK’s rating given the country’s trade and financial links within the euro area.
Ms Lea said: “Moody’s endorsed the fiscal austerity programme of the Chancellor, who has very little fiscal wriggle room in the forthcoming Budget [21 March].”
She also claimed that better prices inflation data, which show CPI inflation had dropped to 3.6 per cent in January, “will reduce the squeeze on real incomes”.
Ms Lea said: “Moody’s warning was a wake-up call to those who believe significant fiscal easing would help the economy.
“Such easing would inevitably increase the risk of a downgrade to Britain’s rating, which in turn would almost certainly raise interest rates.
“Given the constraints on fiscal policy, the government should start introducing radical growth policies, including deregulation and lower business taxes, paid out of tighter public spending controls.”
