The UK lost its coveted AAA credit rating Friday when ratings agency Moody’s downgraded the country to AA1. It's not much of a difference at first glance, but as always, the devil is in the details.
If a country's credit rating is downgraded, that affects its cost of borrowing. The horsemeat scandal has damaged confidence in the UK's food industry, and now the credit downgrade will hit the economy hard.
On March 20, Chancellor George Osborne will reveal his spring budget, and it will not be pretty. Osborne has committed the UK to austerity measures, and a change of position is unlikely. Brits already know their incomes will dip this year; the effect of the credit-rating downgrade could be a double whammy.
In the 2012 budget Osborne announced a crumb of comfort to drivers in the UK. A planned hike in the price of fuel was postponed. As usual, though, what George gives with one hand he takes from someone else. Pensioners received an unexpected hit, but unsurprisingly the 50p top rate of tax was cut. In the end, the budget was all about which section of people the coalition wanted to fund the UK’s economic mess—and Osborne opted for the poorest in society.
Fuel prices are due to increase in March, and Osborne cannot afford another postponement. The British treasury relies heavily on fuel revenue. According to the Automobile Association, “Unleaded prices have risen by 5.8 [pence per liter] from 132.1ppl to 137.9ppl. Diesel prices have risen by 5.0ppl from 139.8ppl to 144.8ppl. The price difference between unleaded and diesel has fallen to 6.9ppl.” There are regional variations but the overall picture is one of high fuel prices. Too high even before a planned government increase.
High prices at the pumps affect all aspects of our economy, including food prices. Consumers often forget that an increase in fuel prices may lead to an increase in the cost of a range of products and services.
Osborne and members of Cabinet will already have budget ideas in mind. The credit downgrade could cause a rethink.
The coalition government has broken many election promises. Unlike Lady Thatcher, who famously was “not for turning,” the ConDems spin uncontrollably, in every sense of the word. Osborne will want to protect the elite in British society, that elusive 1 percent, but doing so will not help the economy.
A depressed economy can result in a depressed nation. When unemployment is a distinct possibility you are unlikely to go on a spending spree, unless you are foolish or could not give a damn. As people in the UK have no choice but to get used to living on lower incomes, they tighten their belts. “Make do and mend” was a worthy wartime adage, and it is one that could apply in these tough economic times, too. The trouble is, that way of life does not help the economy.
Manufacturers and retailers need people to spend. As economic confidence nosedives and people limit their spending, a wide range of services, manufacturers and retailers will go to the wall.
City centers across the UK look like no-go areas as shops cease trading and premises are boarded up. This has a knock-on effect on other traders. Who wants to wander around a run-down shopping area when you can shop online or elsewhere? Other shops lose trade and close in the familiar domino effect.
Is there any way out of our current economic gloom?
Well, there are glimmers of hope from time to time, but Osborne and his partners in government will have to look at a radical overhaul of thinking. There is little doubt that given an opportunity they will scrap the minimum wage, brought in by Labor. That may appease their supporters, but it will not help the economy one iota.
You only have to look at child benefit changes to see the root of the problem
Child benefit was paid to all mothers with children under the age of 16 (or 20 if the child was still in full-time education). It was not means-tested. Whether you and your family lived on a pittance or sat on thousands of pounds, child benefit was your right. The coalition government decided this needed changing, and many people agreed.
Child benefit is now means-tested, but the government shied away from sensible reform in case it alienated their supporters. With an election scheduled for 2015, current thinking is tainted by early election fever. What they did was set the level too high.
A person can earn up to £50,000 a year and still claim child benefit. If you earn more that £50,000 a year, your benefit is reduced or stopped. However, if a couple earns £40,000 per partner, the child benefit is not affected.
It is not difficult to see what is wrong with that. If the government had taken a tough stance, the treasury would have gained extra revenue.
The problem is it is all about choices
In our lives we all make choices. Good financial choices can result in peace of mind and a nest egg, whilst bad choices can lead to sorrow and poverty. That is equally true for the government.
At the drop of a hat the UK coalition government and our chancellor may commit the British people to conflict in a far-flung land. When it comes to wars, Britain appears to have a bottomless pit of money. Of course it does not, but our leaders choose to spend taxpayers' money this way.
So, George, it is all about choices. The UK's credit downgrade is due to your bad choices. Members of the current government continue to blame the failings of the previous Labor government, but that will no longer wash.
It is time for Osborne to make the right choices for the UK economy, rather than ones that will benefit or protect a select few. If he cannot or will not, maybe it is time for him to join the unemployed of the UK.
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