Helen Thomas is a research fellow with Policy Exchange's Economics Unit.
Standard & Poor today placed the UK on a “negative” outlook due to the potential
deterioration in the debt burden. The IMF agreed, advising yesterday that the
Government must "put public debt on a firmly downward path faster than
envisaged in the 2009 Budget”, as well as warning that further capital may need
to be put into UK banks.
This isn’t just more bad news for the Government in a bad news week. This highlights the potential for a very real downturn in the fortunes of the UK in the longer term. Of the 18 sovereigns rated AAA by S&P, the UK is the only one now on a negative outlook. It is also the first time the UK has been in such a position since S&P started rating it in 1978.
The last country to lose its triple-A rating was Ireland, in March. An emergency budget was introduced in April.
Economically, therefore, it is no longer advisable for “spending cuts” to be considered dirty words. But politically, there is still a heavy price to pay (as Ireland’s ruling party have found out). If the Conservatives put forward a plan for credible fiscal consolidation, they might just save the country from the long-term costs associated with a downgrade – but at the expense of their lead in the polls. Alternatively, the public might be ready to see that continued Labour spending and borrowing is not only unsustainable, but downright damaging for any long-term UK recovery.
Getting the spending cut debate out into the open is now vital to maintain international confidence in the UK. The UK economy cannot recover on a wing and a prayer. It is not enough for Labour to hope that their overly-optimistic growth forecasts pan out, and to pray that the bank recapitalisations are enough. As time goes on, and the recession persists, the costs required to clear up the eventual mess will rise. All eyes are now on whether the UK can deliver a credible fiscal plan: but with an election year ahead, will either party be able to rise to the challenge? If not, the economic battle, as well as the political game, will be lost.
