Britain’s Strategy to Combat the Budget Deficit by Policies that Impede Growth is Partly Successful – Growth is Indeed Down, but the Deficit May Cause a Debt Ratings Downgrade

The Conservative Policy in Britain is Not Working; Conservatives Will Continue the Policy

Any contrast between the United States and Britain must start with the different policies that each country implemented in response to the severe economic downturn.  In the United States the President pursued a Stimulus based on basic Keynesian economics, and while it was not sufficient to bring unemployment down to acceptable levels, it did result in higher growth, lower unemployment rates and better economic conditions than would otherwise have happened.

In England a coalition government decided that the key to economic success was to cut spending, fire about 400,000 to 500,000 government employees and to raise taxes slightly.  The idea was that this would bring the budget deficit under control and produce “confidence” that would result in business investment and consumer spending.  There was no rational basis to believe this policy would work, and now there more indications that it is not working.

It caused barely a quiver in the markets. But a warning that the UK faces the loss of its top-notch credit rating threatens one of the biggest upheavals in government bonds.

For some investors, it marks the beginning of the end for the UK government bond bull run, which stretches as far back as the early 1990s.

They fear the Moody’s decision late on Monday night to put the UK’s triple A credit rating on negative outlook will lead to the “nightmare scenario” of rising yields as the faltering economy slips into reverse.

That’s right,  a policy whose single goal was to improve the fiscal position of the country is resulting in a possible ratings downgrade and potential increases in interest rates, which would further erode the fiscal position. 

In a rational world Britain would re-examine its policy positions.  But remember, Conservatives are in charge and for Conservatives the ideology must be correct, or else they couldn’t be Conservatives.  So they want to “stay the course”.

Chancellor George Osborne defended the Government's austerity package today after Britain was threatened with the loss of its AAA credit rating amid fears over weaker growth prospects and potential shocks from the eurozone crisis. . . .

The Chancellor told BBC Radio 4's Today programme: “We can't waver in the path of dealing with our debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating but, more importantly, what that leads to potentially is a loss of investor confidence in our economy.

“If people don't invest in our economy, you don't get growth and you don't get jobs.

“It's yet another reminder Britain doesn't have some easy route out of the economic problems that have accumulated over the past decade, it's got to confront those problems head-on and that's precisely what I intend to do.”

How long will the Conservatives continue their policy of destroying their economy in the name of an unsupported economic theory?  Probably until it works, or the next election, whichever comes first.