UK credit-rating threat rattles politicians

Moody's decision to put Britain on a negative outlook had a greater impact in Westminster than in the financial markets, suggesting that the ratings agency wasn't telling us much that investors hadn't worked out already.

However, the shadow chancellor, Ed Balls, leapt on the announcement as a sign that the Treasury had got its strategy all wrong. "Unless you have growth, your plan becomes self-defeating," he said. "With our economy now in reverse, unemployment at a 17-year high and £158bn extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is increasing by the day."

Chancellor George Osborne insisted that, on the contrary, it demonstrated the importance of sticking to his guns. "I don't see this false choice between growth and dealing with your debts. If you don't deal with your debts, then you will definitely not have growth."

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Politically it was "possible to read the Moody's missive either way", says Jeremy Warner in The Daily Telegraph. One of the main threats to Britain's AAA rating was identified by Moody's as slow growth, which appears to support the opposition's message that the coalition is "cutting too far too fast".

Yet the other is that "economic stagnation may cause the government to lose its resolve and go slow on deficit reduction". However, from an economic point of view, much of what Moody's is saying is "blindingly obvious". It doesn't take a genius to realise that if everyone is tightening their belts, demand is "likely to take something of a hit".

Osborne would be well-advised to concentrate on finding some growth. This doesn't mean he should surrender "to Labour's calls for a Plan B" (as The Guardian points out, Osborne thinks the country "smells a rat" when it hears Balls talking about borrowing more to get on top of the debt), but deliver some "radical supply-side reform", including "investment-friendly tax breaks, and work-incentivising tax cuts".

It's not that simple, says Larry Elliott in The Guardian. Osborne's fear is that a "modest giveaway budget would be the worst of all possible worlds": not big enough to boost growth but big enough to scare the markets, causing interest rates to rise and negating any "impact of tax cuts and spending increases".

The truth is that Osborne and Balls seem "equally baffled by events" and "political grandstanding" won't help, says Simon Jenkins, also in The Guardian.

There is a conflict between austerity and growth. Clearly it "makes no sense to drive an economy into recession where it stops people from working and thus paying more taxes". Indeed, the failure of the financial elite to "think out of its box" and stimulate demand is ruining the lives of citizens across Europe.