Wednesday, 30 March 2011

Two risks, two gambles

Looking ahead, there are no easy options for the UK economy. The present government is accused by the TUC and the opposition Labour Party of taking a gamble with the economy by making excessively deep cuts. They have a point. Substantial amounts of money are being withdrawn from the economy at a time when there is little growth and fragile confidence.

However, the plan espoused by these critics is a gamble also. Their gamble is that the government will be able to borrow more from bondholders and that this extra debt will be effective in kick-starting the economy, or at least protect it from recession. The government’s plans will still see debt rising, just not by as much as under the “Plan B” espoused by the opposition.

The government says borrowing more risks the UK’s credit rating, and at worst its solvency. They have a point: ahead of last year’s election all the bond credit rating agencies flagged up the risk of the amount of debt carried by the UK. It was clear that the UK’s prized AAA rating was under threat. And in a rather under-reported story, following the budget rating agency Moody’s said the UK’s AAA rating remained at risk.

So there are two gambles on the table for the UK, one based on the state taking on more debt, the other based on not taking on more debt. In the wake of the biggest debt crisis of anyone’s lifetime, and continuing solvency issues in many European governments, it is not so surprising the government has opted not to tap its credit card any further.