Friday, March 19, 2010

Moody’s blues: social cohesion vs credit ratings

This week there was a commendably frank statement on the biggest political issue of the decade. It came from a credit-rating agency, and concerned public spending cuts.

There’s disagreement (recall those economists’ letters) about which is the bigger economic threat: cutting public spending and the deficit so fast that a still-feeble private sector can’t take up the slack and we fall back into recession; or letting borrowing stay so high for so long that the markets take fright, the government’s credit rating is damaged and public-debt servicing becomes much more expensive.

Both sides of the debate claim that their approach can achieve the aims of the other side: the cutters say that a lower deficit will improve business confidence and boost growth; the borrowers say that public spending will support a stronger recovery, which will lower the deficit.

FWIW my own view, at least at this stage, leans towards the borrowers:

  • Private-sector weakness is likely to persist due to tight credit availability – the crunch hasn’t gone away, you know.
  • Recessions caused by financial crises tend to have weaker recoveries, as do global recessions.
  • The flipside of our relatively resilient labour market is the risk of a jobless recovery, at least for a while.
  • Gilt yields are up, but despite the end of quantitative easing, they haven’t surged, so the cost of borrowing still isn’t anything like as much as in previous decades – and we’re pretty much getting to the peak of gilt issuance now.
  • UK public debt is pretty long-dated, so we’re not needing to raise as much cash on the markets to replace expiring bonds as other countries with smaller deficits.
  • And by international standards, our total public debt isn’t that large.

But timing matters. Last year, as the recession was raging, only crazy people were advocating immediate deficit cuts. Assuming continued growth, the economic case for cuts will become far stronger in the next year or two.

This year, as we’re just inching into recovery, the debate is more balanced. Neither a double-dip via over-hasty cuts nor a borrowing spiral is an outrageous fear, and any sensible approach will have to take both risks into account.

But there’s a third aspect to this, beyond any of the economics: spending cuts have social consequences. Let’s not imagine that deficit reduction on the scale that the IFS describes can be done via efficiency savings. Services that people – particularly but not exclusively poorer people – rely on will suffer.

And here’s where the credit-rating agency Moody’s comes in, this week grimly warning the UK and other countries:

Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion… the severity of the crisis will force governments to make painful choices that expose weaknesses in society.

Moody’s, as you’d expect, treats massive deficit reduction as the sine qua non and everything else as an unavoidable shame that we’ll just have to get through somehow.

But is that right? It’s a political belief, not a mathematical fact, that the government’s AAA rating needs to be protected whatever the social cost, whatever the sacrifice, by fighting to the dying breath of every last teacher, nurse and constable. A credit-rating downgrade is neither necessary nor sufficient for raising the cost of borrowing.

The quality of public services should be treated as a factor – a really important factor – to be weighed alongside others (the cost of borrowing, the enfeebled private sector), not a sad but inevitable piece of collateral damage in the War on Debt. Intelligence reports suggesting that the ratings agencies possess weapons of mass destruction are deeply dodgy. And so is the argument that we have to inflict the mass destruction on ourselves to appease them.


Richard T said...

Just a thought, is not the persistent pressure to reduce speding from the business sector (and the Tories) not class war? It seems self evident that protecting privilege and a low tax regime at the expense of the needy is precisely that.

Liam Murray said...

Good post. I don't buy the idea that we need to 'test social cohesion' either but for a slightly different reason.

At the risk of reverting to type here - right-wing moans about public spending - what proportion of public spending is on direct, tangible things that materially impact peoples lives? Think of all the 'Early Years' investment spending Labour have introduced and the at best 'mixed' evaluation these things have received. Yes there's an argument - that might well be right - that these are generational things (a la Sweden) and even 10 years is too early for them to bear fruit; the point is there'd be little other than mild irritation if these things disappeared.

SureStart is a perfect example - noble idea, probably a god-send to some parents in some areas and may well yield some indirect social benefits downstream somewhere. But to tens of thousands of mums (like my wife) it's a subsidised middle-class creche, mums roll-up in their 4x4's for cheap coffee and free books and the whole thing is about as far from genuine, early years support for troubled families as you could possibly get.

Social cohesion might be tested by class sizes of 60+, 5 week waits for doctors or a next to invisible local police force but nobody's suggesting outcomes like that, even under the severest cut regimes.

It's kind of why I've always been a floating voter because you elect people with certain instincts for certain times. I voted Labour at the last 3 elections because society had been stripped to the bone, we''d lost any sense of civility & cohesion and we needed people with an instinct for building that up and addressing those shortcomings. Now we've paid so much attention to those things that we've smothered the individual, the familial and the local; we've come to believe that there's nobility in 'just trying things' provided there's nobility in your aim. We need people with different instincts, people minded to cut that back and promote self-sufficiency and individual resilience. They'll go too far of course and then the pendulum swings...yada yada yada

(sorry for lengthy comment-come-rant...!)

Giles said...

Good post.

What I find interesting is that 18 months ago, all the debate about spending cuts would have been abotu this i.e. the social costs, the unfairness, versus the taxes needed. Classic stuff.

Then around Jan 2009 it started dawning that the equation was not tax-versus-public services, but recovery versus debt burden. I attended a meeting of some policy makers in Jan where the ground was actually shifting, but the language needed to catch up.

I think we are probably still in that phase. - it will be a few years before the old dialogue will return. Growth and debt levels are still the worries.

CS Clark said...

Social cohesion might be tested by class sizes of 60+, 5 week waits for doctors or a next to invisible local police force but nobody's suggesting outcomes like that, even under the severest cut regimes.

Social cohesion can also be affected by life getting just a little bit shittier in lots of ways (especially when you look over the fence and see a small number of people who can pay their way out of the inconvenience without thinking twice). That's the basis behind ostensibly right-wing zero tolerance schemes, isn't it? Even when we don't fix windows, get rid of graffitti or suffer low-level classroom disruption we don't justify it because we're only concerned about the big problems.

Paul said...

Moody's said almost the exact same thing three months ago.

"In those countries whose debt has increased significantly – and especially those whose debt has become unaffordable – the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.

In several countries – including some highly advanced ones like Iceland or Ireland, but also Latvia or Hungary, as well as in some much poorer countries like Jamaica – a great sacrifice is required from the respective populations. …………….

In 2010, the ongoing crisis will further test such fortitude. We are closely monitoring signs of economic rebound as well as of political and social tension as early indicators of the sustainability of fiscal efforts."


Since then there's been the Greek 'unrest', but they've not changed their sina qua non.