Britain’s Triple A loss and why we needs to worry in the long-term.

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The recent downgrade of Britain’s credit rating from AAA to AA1 by Moody’s was one of the least surprising decisions in the political year. It was clear that after both France and the USA’s downgrade that the UK, with its growing debt, was also heading for a change. The UK has suffered badly over recent years. Its economy is rich in financial services and so was disproportionately affected by the credit crunch. Plus, the slowdown of European markets has caused demand to wane from Britain’s biggest trading partners. Britain’s debt is large and growth rates are slow, and the economic picture looks bleak for the foreseeable future. Whilst the downgrade itself isn’t dangerously problematic, it signals much larger and inherent problems with the UK economy.

The short-term fallout the downgrade will bring few large-scale issues. There has been a big devaluation of the pound but when coupled with devaluations against the euro and the dollar since the start of the year it, this could actually make Britain more competitive in the short-run. Some believe that in the long-term the shock of this currency fluctuation will fade and Sterling will regain lost value when buyers realise the UK economy has changed little since the downgrade. (6) Another positive sign for Britain in the short-term is that little has changed on the stock market since the announcement; share prices have remained relatively stable, mainly because investors already expected the downgrade and thus had priced it in. (4)

That said, the projection for the long-term is far bleaker. If we have another crisis, such as that in 2008, there would be real questions as to whether we would be able to cope for a second time. (5) The UK economy is largely based on financial services and with worries over defaulting or bad debt in southern Europe, we could be liable for large losses. Add that to an already heavily indebted nation and it becomes clear that if another crisis happened in the next few years, we simply would no longer have the means to initiate another bailout.

Slow growth was a large part of the reason for Britain’s downgrade.   Moody’s claims that this stagnation is underpinned by the effects of Europe’s shrinking economy (5) and the damage that has done to our exporters. 52% of Britain’s trade is with the EU (1) and it’s clear that we won’t be able to rely on many of these countries for the growth of domestic businesses. Evidently, Britain’s economy is going to need a lot of restructuring to focus business on the BRIC counties and other developing markets. There is next to no room for expansion into many developed markets and many European markets are on a permanent road of decline.

Our over reliance on public spending and continually increasing debt is possibly the largest reason for the downgrade and the most worrying feature of the UK economy. By 2016 Britain’s debt is expected to peak at £1,600 Billion which is 96% of GDP (3). We have had many years spending more on servicing the debt than we do on national defence. If Britain continues on this trajectory, we will struggle to regain health in our economy. We are currently spending £128 billion more than we are taking in each year (3) and welfare spending is ballooning out of control. Our so called austerity programme has been anything but austere with government spending increasing year on year. Unless we make more drastic cuts our economy will become increasingly overburdened by debt.

The political fallout the downgrade itself has had little effect on the polls with Labour still having a double digit lead over the Conservatives and figures being close on the question of which party is best to the run the economy. (2) Many in Britain realise that reductions in spending are the only way forward. News stories reiterate this fact  and the string of bad economic news that has plagued the government since the start of the coalition and may end up being a bigger part of a Labour attack strategy.

Overall the downgrade was a sign of the times rather than a shocking signal, it was expected and in the short-term will have little to no effect on Britain’s economy apart from some devaluation in the pound. In the longer term however it shows that the UK still has some very large scale problems to deal with. No longer can we rely on our old export markets for growth, nor can we continue to run our financial affairs in the way which we have previously done. Changes must be made in order for us to pull out of this long term near stagnant economy. On the political front though it’s just another piece of ammunition for Labour, although polls say people seem unaffected by it. Come 2015 though voters will have forgotten what the downgrade was all about.

Article by Jack McGill

Edited by Joe Austin