It's The Deficit Stupid

Last week, international credit rating agency S&P took the remarkable step of downgrading the credit ratings of France and eight other European countries. That is a clear sign of just how bad the outlook is for the debt-laden economies of the Eurozone. It is also a danger sign for us, because poor economic performance on the continent will have a negative impact on our own economy

 

The credit rating agency stated that: "Budgetary measures announced by the French government to date may be insufficient to meet deficit targets...", and "...the ratings could stabilize at current levels if the authorities are successful in further reducing the general government deficit..." In other words, the French don't have a credible enough plan to reduce their deficit. They also rated France's outlook as 'negative', which means there is a one in three chance of a further downgrade. France has the biggest debt burden of the six top-rated euro nations

 

It may surprise people to learn that France's budget deficit is less than 8%, compared to Britain which has a much worse budget deficit of almost 12%. And yet while France has been downgraded, Britain is the only major economy in the world to have actually had our credit rating improve over the last 18 months. That is a direct result of our credible economic policy. In 2009, under the last government, Britain's credit rating was put on a 'negative outlook' and the cost to the government of borrowing money was rising - risking higher interest rates. After the election and the change of government, our 'negative outlook' credit rating was lifted and the cost to the government of borrowing money has fallen dramatically - helping to sustain low interest rates throughout the economy. Last week, foreign investors viewed Britain as such a safe haven that our government bond yields actually went negative (which is a good thing - the lower the better). That meant, remarkably, that people were paying the British Government for the right to lend us money.  Perhaps it is no coincidence that it is against this backdrop that the shadow chancellor, Ed Balls, has announced the biggest political u-turn in a generation. In the same week that France was downgraded, Ed Balls announced that Labour now accepted the need for all the government spending cuts that have been announced, and would not commit to reversing any of them. The position is still a bit confused. Apparently he still 'opposes' the spending cuts, but at the same time he agrees they're necessary. If that confuses you, you're not alone - most MPs and journalists are still trying to work out what that means. But the principle is important. Perhaps he looked at France and realised that his previous policy of opposing every cut was simply not credible.  If this represents a more grown up period of economic debate, in which the government and the official opposition can at least agree that the record deficit is the most important and dangerous issue facing the country today, then I welcome it. Having the opposition refuse to even admit they left a deficit problem was bad for us all. Whether this is a genuine shift in the debate remains to be seen, but the risk to us all of not gripping the deficit is too big a risk to contemplate. If we don't want to go the way of France, or ultimately Italy and Greece, we need to get a grip of the deficit - and if Her Majesty's Loyal Opposition now understands that and is going to become a positive part of the debate, that must be a good thing. We shall see.