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Economy: Credit Rating

Volume 743: debated on Monday 25 February 2013


My Lords, with the leave of the House, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.

“Mr Speaker, this decision is a stark reminder of the debt problem built up over the past decade and a warning to anyone who thinks that we can run away from dealing with those problems.

I can report that we have not seen excessive volatility in the markets today: 10-year government gilts are broadly flat—trading at around 2.16%—within the trading range of the past week and near the very lowest rates of borrowing in our history. The FTSE 100 is currently up by about 35 points. The credit rating is an important benchmark for any country but this Government’s economic policy is tested day in, day out, in the markets—and it has not been found wanting today. Families and businesses see the benefit of that in those very low interest rates.

If we accept the outcome of the rating agency decision, we must accept the reasons given for that decision. Moody’s points to the combined impact of what it describes as the ‘slow growth of the global economy’ and the necessary ‘domestic public- and private-sector deleveraging process’—in other words, the process of winding down the huge debts that built up in our society over the past decade.

That is the environment we are operating in, dealing with the very high deficit and debt trajectory this country had coming out of the financial crisis, made more difficult by the economic environment abroad. For on the same day as the rating decision, the latest European forecasts showed the eurozone deep in recession and growth in key economies such as France and Germany weaker than ours.

Crucially, Moody’s says that the UK’s creditworthiness remains ‘extremely high’ because of our ‘highly competitive, well-diversified economy’ and a ‘strong track record of fiscal consolidation’—what it calls the ‘political will’ to ‘reverse the UK’s debt trajectory’. Its message to this Government and this Parliament is explicit: the UK’s rating could be downgraded further if there is a ‘reduced political commitment to fiscal consolidation’.

You will not get that reduced commitment from this Government. We will go on delivering on the economic plan that has brought the deficit down by a quarter and helped create a million private sector jobs, and which continues to secure very low interest rates not just for the Government but for families and businesses in the country.

Ultimately, that is the choice for Britain: we can either abandon our efforts to deal with our debt problems and make a difficult situation very much worse, or we can redouble our efforts to overcome our debts, make sure that this country can earn its way in the world and provide for our children a very much brighter economic situation than the one we inherited from our predecessors. That is what I am going to do—and that is what this Government are going to do”.

My Lords, that concludes the Statement.

My Lords, the Conservative Party manifesto said:

“We will safeguard Britain’s credit rating”.

When that rating was maintained immediately after the 2010 election, the Chancellor said:

“That is a big vote of confidence … in the coalition government’s economic policies”.

Does the Minister not feel embarrassed to have to come here this afternoon to eat all the Chancellor’s words, and does he not accept that this downgrade shows that the Government’s economic strategy has failed, in their own terms? Will he confirm that Moody’s says that the main driver of its decision to downgrade is the weak growth of the British economy? When does he expect growth to return to the 1.8% level of 2010?

At the 2010 Conservative Party conference, George Osborne said that a credit downgrade would put Britain “on the brink”, as he referred to:

“The lost jobs. The cancelled investment. The businesses destroyed. The recovery halted”.

Since all these things have now come to pass, is it not time to change course?

My Lords, if I may be very specific about Moody’s expressed reasons for the downgrade, it is due to the,

“slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process”.

The noble Lord is absolutely right that we are growing far more slowly than was anticipated. That is a phenomenon of being highly constrained in a global economy that has had severe problems. Every other piece of advice implicit in Moody’s explanation for this downgrade tells us that the most critical thing is to continue with the path of fiscal consolidation.

My Lords, does my noble friend accept that we were supposed to have this Urgent Question much earlier in our proceedings, and that if this does not happen the Whips should rise and say what is going on?

As far as the substance is concerned, does my noble friend agree that it is absolutely crucial that the Government should continue with their existing policy? The reality is that they have not managed to reduce the deficit as fast as we would have liked. The Labour Party is saying that the reduction is being done too quickly and by too much, but clearly the reason why we have had this reassessment of our position is that it has not been done as quickly as international opinion might feel would have been appropriate.

If we are going to take this attitude, it is essential that aggregate demand should be maintained. In that instance, a further increase in quantitative easing would be appropriate. However, we are in some danger of having economic management split between an unaccountable Monetary Policy Committee and the Treasury. Perhaps this point also should be taken into account.

I thank my noble friend for those observations. As for the timing of the Statement, I think that it was simply a matter of the earlier session not finishing on time. I, too, have been here for an hour and a quarter ready to talk about this Question.

On the economic substance, my noble friend raises a number of extremely important points. I do not think that we can evaluate the current economic situation in terms of a direct trade-off between growth and fiscal consolidation. The essence of the situation that we find ourselves in is that fiscal consolidation is an absolute prerequisite for recovery and for the confidence of the markets which allows us to borrow to finance this extremely high deficit. My noble friend is right that an array of other policy weapons is available to prosecute a growth agenda. That includes multiple supply-side reforms to make our economy more efficient, and the Government are fully embarked on those. An activist monetary policy plays an important part, but—I agree—within a constraint of managing very carefully any inflationary risk.

My Lords, the Statement makes it clear that there is the very real danger of further demotion if growth is not achieved. Have Moody’s or any of the other exalted bodies that are our lords and masters in this connection given any indication of at what point a failure to achieve acceptable growth will make possible a further and calamitous demotion?

Interestingly, Moody’s has established that the outlook is stable. That means that it would not anticipate a further ratings change in the next 12 to 18 months—unlike the situation with the US and French economies, where the outlook is deemed to be negative because they are not perceived to have the same political will to drive down the deficit. The focus of the ratings agencies is much more to do with the management of our debt and driving down the deficit than directly with growth. Growth gives you the fuel to help manage down the debt, which is their primary concern.

My Lords, is not the situation even worse than intimated by the noble Lord, Lord Higgins? We have a state of affairs in which the markets are totally confused by the position taken by the Governor of the Bank of England and the Monetary Policy Committee and in which the Chancellor of the Exchequer has been found abjectly wanting by the witness whom he most insistently prayed in aid. What prospect is there of the Government getting a grip on this sliding situation?

The noble Lord exaggerates the confusion or nervousness of the markets. My interpretation of the markets is that there is very little volatility at the moment; the markets have taken this situation entirely in their stride. The market variable that has shifted the most is the exchange rate, where sterling has moved back to a range where it was trading before the eurozone crisis. The risk that has gone out of the eurozone sector has enabled the euro to strengthen; and the risk that was inherent in the US so-called “cliff” situation did not materialise, which has allowed the dollar to strengthen relative to sterling. I do not think that the markets are doing anything other than continuing to reward this Government’s focus on fiscal consolidation, which is why we are borrowing at these incredibly cheap rates.

My Lords, perhaps I can pursue an issue which my noble friend talked about: policy weapons which can be used to promote growth in a sustainable way. The Government have acknowledged that infrastructure is one of those policy weapons and that moving decision-making locally is another. I wonder whether now is the time to remove some of the constraints which the Government—the Treasury—have put on tax increment financing for local government, so that it can use that challenge to increase growth locally. At the moment, the restrictions that have been put on TIF by the Government will have the effect that very few schemes will come forward.

I thank my noble friend for bringing a very constructive perspective on ways in which we can address some of our supply-side problems in the short term. Investing in infrastructure and devolving spend to the regions, where they have a clearer grip on the projects necessary for local growth, is one thing that we should be pursuing. I know that my right honourable friend the Chancellor will be making some announcements in the Budget with respect to following through the recommendations of my noble friend Lord Heseltine.

My Lords, can the Minister enlighten us as to what will be the Government’s response to the failure of their deficit reduction plan? That is the reason why we have had the downgrade: because the deficit is not being reduced as was hoped. Do the Government agree with the Secretary of State for Business, Innovation and Skills, who says, “No more cuts”, or will they accept the advice of the No Turning Back group, and say that what we need are more cuts in spending so that we can have more cuts in taxes? Does the Minister agree that this is a Government without a strategy to face this looming crisis?

The noble Lord identifies some of the trade-offs that we have to tread carefully between. I think that the Government have an extremely clear economic strategy. Not everybody necessarily agrees with it, but the strategy could not be clearer. It is to demonstrate to the markets that we absolutely have control of the public finances, to reform our financial system, to ensure that we have the right kind of activist monetary policy and to ensure that, right through the economy, we introduce real microeconomic reforms that can unleash the productive capacity of the economy. That is an extremely clear strategy. It has been prosecuted with consistency through the life of the Government.

Moody’s is entirely supportive of government policy, which is to focus on reducing the deficit. It has merely demonstrated that because of the slow growth in the world economy and the huge debts with which we started this process, it is taking longer than we would all hope.