The UK lost its coveted AAA rating last month when Moody’s downgraded its assessment of the nation’s creditworthiness. It is likely that Fitch’s rating agency will follow suit next month, citing concerns that UK debt levels were higher than expected and over the downward revision of projected UK economic growth. During his budget speech, the Chancellor of the Exchequer, George Osborne, reduced the growth projection for 2013 from 1.2% (forecast as recently as December) to 0.6%. The UK is in the midst of austerity measures which are designed to tackle the budget deficit and, ultimately, to chip away at the UK debt mountain.
The reduction of government spending programmes to save money clearly reduces demand within the UK – since less money is being spent on goods and services. This drag can also lead to job losses as businesses try to match their workforce to reduced levels of demand and the policy is at least somewhat controversial. The IMF was amongst those organisations counselling that deficit reduction must not be at the expense of growth.
A new and influential voice has also raised concerns over the UK government’s economic policy and a recent budget promise that the state would underwrite some new mortgages. Professor Larry Summers, a former US Treasury Secretary, ex-chief of the World Bank and an advisor to no less than three US Presidents said that the UK economic policy was “illogical”. Speaking on the BBC’s Newsnight Programme, Professor Summers remarked:
"I must say as an outside observer I have had some difficulty following the logic of British policy, I would have supposed - and it's something that's taught in basic finance text books - I would have thought a loan guarantee is more or less the same thing as a loan. Both expose tax payers to risk of loss. Britain has been a powerful and empirical test of the efficacy of determined, resolute austerity. The results so far have not been encouraging to advocates of that strategy. The results so far have suggested that in line with predictions that austerity has led to reductions in demand which has led to reductions in output, to an even greater extent than pessimists predicted."
For his part, George Osborne has made it clear that continuing with the government’s policies is the only way forward for Britain.