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Citi: Osborne “no longer has credible plans” to tackle debt

7 December 2012

3:24 PM

7 December 2012

3:24 PM

Britain will lose its AAA rating within 18 months because George Osborne ‘no longer has credible plans to put the debt/GDP ratio on a stable or declining path’ according to Citi. Its verdict is worth reading in full (pdf) and is important because it adds weight to the idea that — as a result of Osborne’s lack of progress on the deficit — 2013 will be the year of the British downgrade.

What did it for Michael Saunders, the Citi analyst, was seeing Osborne take what James Forsyth refers to in this week’s political column as the St Augustine approach to deficit reduction: ‘Lord, let me balance the books but not yet.’ This eats away at Osborne’s credibility. Saunders says that, now,

‘The UK no longer has credible plans to put the debt/GDP ratio on a stable or declining path in our view, given that roughly half of the planned fiscal tightening is scheduled beyond the next election and beyond the end of the current detailed spending plans.’

He produces a graph that shows just how, with each statement that Osborne makes, his St Augustine complex kicks in harder – shoving more pain on to the post-2015 period.


Saunders continues:

‘It now seems likely that the mix of the rising debt ratio, weakened fiscal framework and uncertainties over the implementation of fiscal consolidation will lead to a one-notch downgrade of the UK by at least one major agency in the next 12-18 months.’

Osborne has already downgraded his golden rule:

‘It appears that the “debt target” has become merely an aspiration — for the debt/GDP ratio to fall in one year (2015/16) if the economy surprises on the upside — rather than a genuine target that will constrain policy’

And there was nothing this week to help growth:

‘the emphasis is mainly on trying to adjust the public finances to the weaker prospects for the economy rather than seeking to change the outlook.’

This is the sense of defeatism that I refer to in my Telegraph column today. If Estonia can buck the trend with different policies, so can Britain. Saunders also points to helping the low-paid: ‘renewed labour market deregulation (especially for younger workers)’.

And do downgrades matter? America’s downgrade was famously followed by a reduction in its gilt yields. But Saunders says it would hit Britain. As Andrew Lilco argued on ConHome, Osborne has explicitly asked us to judge him on the AAA rating so when it goes, it makes a Labour government more likely. And if that isn’t a risk to Britain’s economy, nothing is. Saunders puts it more delicately:

‘A downgrade in the UK probably would heighten political risks… [It] would be a major blow for the government and hence, by adding to risks that the coalition parties do badly in the 2015 election, it would increase uncertainty over the implementation of fiscal austerity in the runup to the 2015 election and beyond it — and such uncertainties probably would be bad for sterling assets in our view.’

So what’s next? Saunders expects that S&P will put Britain on ‘negative outlook’ in the next few months and then one agency will strip us of the AAA by the summer after next. Unless, of course, ‘the Chancellor announces a new and credible medium-term fiscal framework that gains broad political support.’ I.e., that he acquires a coherent growth strategy.

PS CoffeeHousers may want to know what I think Saunders’ opinion worth citing. He not only called the election right, but was the first to grasp that Osborne was going to have to tear up his debt target. Do click on the PDF link: it’s the best economic briefing you’ll read all week.

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Show comments
  • Timingiseverything

    The credit rating should have gone, irrespective of S&P support for UK(still not on -ve watch).

    To drag on the decision further out like Saunders says will give little time to Osborne to recover his posturing before the fast approaching 2015 elections.

    An earlier downgrade should have helped the UK as it had helped France,but now as the worst seems to have passed in the US and Euro area back-stop helping, will not afford UK the time to recover from the effects of a downgrade.

    The fairness would be for the downgrade to follow in the coming week for Osborne to have some respect and not risk UK high borrowing costs in the future.

  • Peter

    Sorry a typo,

    2] No Government should run a balanced budget. it should be

    2] The Government should run a balanced budget,

  • Peter

    There is a simple solution, but it won’t be used.
    1] Pass legislation that the Government must balance its books within 3 years of being in Office.
    2] No Government should run a balanced budget.
    3] If a Government, of any Political Party does not achieve 1 & 2. Then;
    Any MP’s who are or have been, including the Prime Minister, a Member of the Cabinet. Should be forced to resign as a MP and not be able to take any further part in Politics.
    Simple question, how many years, in the past 50. Has a Government had a balanced budget? a] 5 b] 3 or C] never

  • D B

    Flat rate tax. But the moronic public will never wear it. We are doomed.

    • Daniel Maris

      I think if you combine a flat rate income tax with universal credit and a graduated property tax, the public will wear it. But you would have to embark on a programme of educating the public about tax.

  • redrum

    duh – of course the bloke doesn’t have a credible plan. 18 months in he’s rearranged the goalposts. I’d be fired in my job for doing that – shame we can’t fire him in the short-term

  • michael

    SME’s …remove the garrote – don’t keep tightening it . Trying to play make believe that little bosses can be politically substituted as HMRC targets for untouchable ex pat ‘big bad bosses ‘ IS UNBELIEVABLY DUMB. It’s the army of oft flighty small traders,small and and family businesses that is the only hope for growth. The Germans understand this and have proved it, and so did Mrs T…. Bottom up, not top down, when self sufficiency is all their is.
    SUPPLY SIDE REFORM, it is the only place we have left to go!

    P.S. I really do prey that the loss of AAA is not a tipping point.

  • Davey12

    Sadly it is easy talking about cutting actually cutting is painful. Because of this stupid coalition and Cameron promises they all in a corner.

    Foreign aid, cut to the bone,.
    Legal aid slash it. Legal aid only for cases in this country. Amount of court cases cancelled on the day when the accused changes the plea to guilty. Hanging on waiting for an error, costing us millions. Once the CPS has decided to prosecute the accused has a month to make a decision, after that no reduction. Any reduction sack the judge. Yet Cameron are wasting time cutting back on compensation to save us £50 million, making us look very nasty.

    Get a mind map of all these quangos You will find lots that have no purpose other than pushing a political agenda., Close them down instantly.

    Green energy stop it.

    Shale gas, I know he is going for it, speed it up.

    The DLA we know 30% fail to show, roll it out fast as possible. The reason for the no show is simple. Labour allowed people to apply without having medicals Many were told to apply by advice centres. If the get a called for a medical don’t go.

    Only people who hate you will object.

    Still voting UKIP.

    • GaryEssex

      You’re spot on!

  • HooksLaw

    You are just trying to sound clever, you have no more knowledge than anybody. Whats for sure is you can say and do what you like without taking any responsibility for it at all.
    Being reduced to quoting Estonia (population 1.3 million, working population 0.6 million) seems pretty close to the bottom of the barrel. Estonian unemployment went from 4% to 16% in the recession. Come on are you promoting that as a policy – if so you were quiet about it in 2008-09.
    Though fair enough, they did do what Brown did not do, pay of debt with growth.

    CITI are no doubt trying to set an agenda whereby they can profit from selling short or buying long or whatever the CITI barrow boys do these days.
    To say as this particular barrow boy does that there is no plan is in itself not credible. The reality is the European economy is in a downward spiral. Countries all over have lost credit rating – we have done all right so far compared to most. Our govt is walking a tightrope of cutting spending eliminating the structural deficit and sustaining the economy.

    Barrow boy Saunders would have Osborne throw the baby out with the bathwater. At least it gives the lie to Labour’s claim of too fast too quick.

  • Count Boso

    Just explain that graph to me again

  • Ian Walker

    Estonia has land-value taxes, STV voting and a balanced budget enforced by the constitution.

    Three things that Britain needs if it’s to lose the shackles of lightweight politicians fighting the battles of last centiry.

  • pilsden

    Fraser about time you posted Tim Morgan’s latest blog it has a great graph on GDP and
    Debt or are you waiting for part 2 ?
    Fyi reference

  • MirthaTidville

    I`m only surprised we have it left…..Osborne hasn`t really got a clue about finance and proves it almost daily…Still I suppose Accountancy and Business Studies were considered a bit passe at Eton….

    • telemachus

      St Pauls

  • RationalSpeculation

    It is odd that having hailed the Olympics (both the organisation and the athletic feats) as a triumph of British can-do spirit, the government is so disinclined to show the same attitude with regards to the economy. We all know there are plenty of problems in the world, but at least we could try and do something about solving them.

    There was an item on the news yesterday (can’t remember which channel, but probably 4) about the Autumn Statement having been “focus grouped” which would go a long way to explaining why it was such a mish mash. Why not actually show some leadership, decide what is best for the country instead of pandering to class instincts, and go ahead and do something? Supply side reforms do work – we showed that in the 80’s. Maybe it’s time to have another go. As it is, all we are doing is waiting for the tide to go out so we all get confirmation that the Chancellor (and the country) is rather short in the bathing suit department.

  • Troika21

    Osborne seems to be taking advice from the Eurozone; if you can’t solve a problem, delay it and hope for the best.

  • an ex-tory voter

    Estonia may have bucked the trend in the EU, but it is a racing certainty that it did not do so by following the Keynesian path mapped out by Darling, Balls & Brown and continued upon by Osborne and Cameron.
    If growth is the solution to the UK’s woes, the answer is simple, “get your hands out of everybody’s pockets”

    • Daniel Maris

      Estonia is dirt poor compared with us – its per capita GDP is about a quarter of ours. But it isn’t far from some super economies: Sweden, Finland, Norway and Germany.

      I don’t think it’s really an example of anything except the opportunities afforded by geography.

    • telemachus

      Look if reducing the Debt/Deficit is a lost cause, then why not borrow, dash for growth and as growth stokes growth watch taxes roll in to finally nail the deficit
      It looks like we will have to wait for 2015 for Ed Balls to achieve this

      • dalai guevara

        you cannot be serious, inflating borrowing would require investment in PRODUCTIVE industries, otherwise you are just inflating the bubble. The final years of the BB Bros are reliable proof that they haven’t got a clue what that entails.

      • George_Arseborne

        Only Tories did not realise this Osborne Chum was an Economic illiterate. The Great Ed Balls saw this long ago an now reality is walking through. We are heading to a triple deep recession. He will be strip off his well priced triple A credit rating. His economy pokicies are in tatters. We are doomed by this dummy Osborne. What a shame

        • 2trueblue

          After 13yrs of economic incontinence from Liebore with Brown, Balls, millipedex2, and our friend Blair, ah and not to forget Darling, (who raced off to give away another £11b to the EU in their dieing days) you think Osbourne is an economic illiterate? Arsebourne indeed.

          Looks like Germany are about to go into recession.

        • 2trueblue

          And of course all these people you rely on got it right? Not, as it turned out. They were so far off base it was incredible.

      • LB

        So lets see.

        Nothing like taking money from people for their pensions and spending it all.

        Robert Maxwell didn’t even manage to spend it all, however the UK government has.

        4.7 trillion hidden off the books, and no assets unless you intend going into the slave owning mode. The state owns you. After all, it already runs a stud book of people’s breeding. Half way there.

    • George_Arseborne

      To some extend George Osborne deserve some praises for making a particular industry to grow exponentially … FOOD BANK. Well don Boy George!!!!!!

  • dalai guevara

    I love the graphs, they are so modern ‘Greek’ in nature…

  • Sally Chatterjee

    Osborne is increasinglt sounding and behaving like Gordon Brown. Financial chicanery, tractor stats and too much politicking.

    • telemachus

      Osborne is not fit to shine the shoes of a giant like Gordon.

      • Chris lancashire

        Ho, ho, ha, ha, ha. No, you really have to stop these jokes tele.

        • telemachus

          Think about it
          Which one is the lightweight?

          • dalai guevara

            Do you realise that diet coke makes you just as fat as the original one? You think you are doing good, but the body is just tricked and will grab the bad stuff from somewhere else.

          • George_Arseborne

            Osborne is no way closer to be Gordon shoe shiner . That was too much compliment for Osborne Telemachus.

          • Chris lancashire

            Yep, thought about it. Osborne, so far, hasn’t sold gold at £9bn loss, hasn’t introduced a 20p tax rate and forgotten to tell us he dropped a 10p to pay for it, didn’t introduce ILAs and found they caused a £100m fraud and, sadly, hasn’t squandered record tax receipts to run a defect. No, you’re right, Osborne is the lightweight, he hasn’t managed any of that. Cheerio.

            • telemachus

              Don’t remember him engineering the longest biggest boom in the economy since the SSB or saving the world banks

              • GaryEssex

                It was not engineered. It was financed by borrowed money and selling off half our gold reserves. I can be very rich tomorrow in cash terms if I borrow enough dosh and also sell my house. That’s the easy bit, it’s paying it back that’s difficult. And that’s where we are right now.
                We need to cut (and I don’t mean delicately salami slice not to offend anyone as now) and I mean cut: benefits, generous pensioner entitlements, public sector pensions, foreign aid…………see, it’s easy but it needs someone with cajones to do it. Unfortunately, there is nobody in this government with the guts – especially with the spineless and gutless LibDems still hanging around.

                • telemachus

                  Council of defeat
                  Pump prime growth
                  Keep the current fiscal grip
                  Then wait for the taxes to roll in

  • William Blakes Ghost

    Does Estonia have a political system thats heavily weighted against one of its major political parties (the one thats in Government)? For the Tories to get a majority they need a 12 point lead because of the perverse imbalances within our electoral system.. They are currently roughly 12 points behind. Given Cameron by pursuing his deranged liberal dreams and forging this disastrous coalition managed to unite the left and split the right pretty much ensured he would be kicked out in 2015 there has never really been any political motive for the Tories to fix broken Britain and in fact I think Cameron has managed to break it that bit more.

    Underr such circumstances why would the Tories (particularly the rejected Roon faction) fix the problems just for Labour to claim the glory and take the acclaim. Its politically better just to hold the fort and then wait for the economically inept Labour party to take the flack. After all thats pretty much what Labour did in the first place.

  • Archimedes

    18 months seems a bit cautious. Either we’ll lose it in 6, or we won’t lose it. Ultimately though, it’s not really conceivable that our interest rates are going to remain low enough for a sufficient period of time that would allow the structural position to be reconciled, even with a return to something close to our trend growth rate.

    If talk at the BoE is about the QE exit strategy, then the UK is going to face rising borrowing costs within the next 12 months, because even if the QE program is not being unwound by then, we won’t be seeing any large expansion in the size of it – not large enough to maintain demand while the government continues issuing a large amount of bonds. The problem is that with gilt prices so high, that’s going to trigger a sell off, and we’re in no position to deal with higher interest rates if we can barely even cut the deficit.

    The notion that there isn’t many other better places for investors to go just isn’t true anymore.

    • dalai guevara

      You forget that QE is an international affair. Has the Fed stepped back from ‘unlimited QE’? What is their timeline, I recall they did not limit this to 2013. And Europe, well, I do not need to elaborate, do I?

      • Archimedes

        Not sure I understand you. The Fed doesn’t buy Gilts, and neither does the ECB.

        • dalai guevara

          It’s a race to devalue. We cannot afford to see the US or the Eurozone print whilst supposedly contemplating abandoning that approach.

          There are three western players, and every one of them is blaming the other two.

          • Archimedes

            I don’t think it would be advisable to use QE as a devaluation mechanism, and I imagine the BoE knows better.

            • dalai guevara

              QE increases M4 without ‘real’ asset backing. How would it not devalue?

              • Archimedes

                QE is when the central bank acts like a private bank and leverages it’s deposits. In theory, if it actually worked, it wouldn’t create any devaluation above and beyond the natural devaluation that might occur as a result of private banks leveraging their deposits for investment, and the effect that would have on prices. So it couldn’t ever be used as an accurate devaluation tool. It’s also likely that the majority of the inflationary effects from QE will be felt in the future as it circulates through the system. The only devaluation that would be immediate is what would happen on the markets as a result of a QE announcement – it would require a very large QE package to achieve a desirable devaluation on the markets, and that would almost certainly cause structural issues down the line.

                • dalai guevara

                  Ok, I see you are talking ‘tool’ whilst I mention ‘effects’ – not quite the same I admit.

                  We seem to agree that QE triggers inflationary effects in the future which will make my pint (of milk) more expensive. If I flew to Norway over the weekend, that pint would still cost me the same it costed last year. The effect felt is one of devaluation.

                • Archimedes

                  Yes, but my point is that if you intentionally devalue then you want it immediately to help exports; and secondly that it isn’t really possible to quantify the exact devaluation that QE will cause, because some (hopefully most) of it will result in an increase in the net assets of the UK.

                • dalai guevara

                  I am with Magritte on this one:

                  An asset is an asset.
                  A bail out is a bail out.
                  Ceci n’est pas un asset bail out.

                • HooksLaw

                  At current exchange rates a litre of milk in Norway is about £1.30.
                  Its about 86p in Tescos. (for the benefit of those socialist thinkers who do not know the price of milk)
                  I blame it on Norway not being in the EU.

                  And fancy not being in the EU forcing Norway to have VAT at 15% on food. And 25% on children’s clothes.
                  All those bar-steward undemocratic bureaucrats in the Not in the EU forcing these shocking conditions on Norway.