Yesterday, Moody’s credit rating agency gave UK debt a clean bill of health, a show of confidence in the Government’s ability to pay its debts.
Asked why the AAA rating was maintained, an analyst with the firm explained: “Moody's stable outlook... is largely driven by the government's commitment to stabilise and eventually reverse the deterioration in its financial strength.”
George Osborne will be pleased. Such remarks vindicate the Government’s deficit reduction strategy. The rationale underlying it was always that failing to cut spending now would simply defer a heightened misery. With a downgraded rating, the interest rates offered on government bonds would have to rise to attract investors deterred by the bond’s newfound riskiness. Huge debt interest payments, serviceable only through economy killing tax rises or spending cuts far larger than those currently mooted, would be the norm. By acting quickly, the Treasury appears to have stayed this nightmarish scenario.
Yet Moody’s praise was not without its warnings. A “resumption of official support programmes” (i.e. direct fiscal stimuli or the underwriting of toxic assets etc) could cause “larger government budget deficits, thereby exerting negative pressure on the AAA rating.” It is thus vital that the government sticks the course and refuses to cave to the manifold vested interests shrieking from the sidelines for increased expenditure. A balanced budget must be in sight by the end of the parliament.