Fraser Nelson Fraser Nelson

Why Britain lost its AAA rating

Even the pessimistic analysts had given Britain until September to lose its AAA rating. That it has happened now, before the Budget, shows just how fast things are moving. Moody’s has tonight downgraded Britan from AAA to AA1 and has also told us why.

Don’t expect economic hell to break loose as a result: these ratings tend to follow, rather than lead, the markets. But this is politically devastating for George Osborne, given that he has asked us to judge him by the preservation of this rating (and made it a manifesto pledge). So what went wrong?

1. The markets now doubt that Osborne has a credible debt strategy. The below graph, released earlier today from Citi, shows how things have gone pear-shaped. It shows debt as a share of GDP, which has risen as growth has evaporated. The green line shows how Osborne first promised to handle the debt. The dark blue line is how it’s now likely to go. The failure of this thick blue line of debt to level out, let alone descend, is why the credit rating agencies are so worried.

Moody’s is not as pessimistic as Citi, and expects UK debt to peak at 96pc of GDP in 2016*. But that’s still bad enough to trigger an early downgrade.

“Given the pace of deficit and debt reduction that Moody’s has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock.”

2. Osborne’s St Augustine strategy: shifting the pain ever-further into the future Moody’s statement refers to:-

“…the government’s fiscal consolidation programme, which will now extend well into the next parliament…which necessarily makes their implementation less certain.”

This is a reference to what James Forsyth has called Osborne’s St Augustine approach to austerity: “Lord, let me balance the books – but not yet.”

Already a subscriber? Log in

Keep reading with a free trial

Subscribe and get your first month of online and app access for free. After that it’s just £1 a week.

There’s no commitment, you can cancel any time.


Unlock more articles



Don't miss out

Join the conversation with other Spectator readers. Subscribe to leave a comment.

Already a subscriber? Log in