The loss of the triple-A rating was a blow for George Osborne, and there could be further blows to come, as the other rating agencies deliver their verdicts and as it appears that he will have to admit in his 20 March Budget that public borrowing is rising, not falling.
A huge amount of ink has been spilt on the loss of Britain’s triple-A sovereign debt rating, and whether this is a humiliation for George Osborne, or merely a huge embarrassment. The fact is that he said he would preserve Britain’s top-notch credit rating and has not done so.
There are extenuating circumstances. The writing has been on the wall for Britain’s triple-A since America was downgraded by Standard and Poor’s 18 months ago. Two of the agencies downgraded France last year. Triple-A ratings are now rare internationally.
Moody’s, which downgraded Britain on 22 February (while insisting the outlook for the economy and the public finances is stable, not negative) had warned last year it would reassess matters early in 2013. It was disturbed by the chancellor’s abandonment of one of his fiscal targets in his Autumn Statement that pledged that public sector debt would be falling as a percentage of gross domestic product by the end of the parliament.
Osborne has said the downgrade has stiffened his resolve to reduce the budget deficit. In the meantime, he has to face up to markets that are no longer as enamoured of UK assets, or sterling, as they were, an opposition that is thoroughly enjoying his discomfiture and the threat of further downgrades from the other two big rating agencies, S&P and Fitch.
He also has to face another potential red-face moment in his 20 March Budget. Two months ago, in my first Tax Journal article of 2013, I looked forward to the January tax-collecting season. Would self-assessment receipts and, more crucially, corporation tax, come in strongly enough? Or would we be forced to concede that in 2012/13 Osborne’s strategy had gone backwards, with the deficit rising rather than falling? This was a key political issue when the chancellor presented his Autumn Statement. Osborne, with the support of the independent Office of Budget Responsibility (OBR), was able to say that public borrowing would fall this year, to the considerable surprise of Ed Balls, his Labour shadow. Nobody would be more red-faced than Osborne if he has to admit his December claims were unjustified. It would be a big political moment and a blow for the OBR too.
The results are in. Official figures for January showed a budget surplus – a repayment of public borrowing – of £11.4bn. This was not only the best for five years but £5bn better than in January 2012.
Is it a case of with one bound Osborne is free? No. Hopes that corporation tax revenues were finally coming through were dashed in January. Corporation tax revenues for the month were a disappointing 13.5% down on a year earlier. In the first ten months of the 2012/13 fiscal year they were 9.1% down.
Some might say that this is unsurprising given the weak performance of the economy, though this is not the whole story. The big weakness in January was in tax paid by North Sea oil and gas firms, which dropped 50% year-on-year, thanks to a 13% drop in production and a significant increase in capital investment, allowable against tax. Onshore corporation tax receipts showed a rise in January compared with a year earlier.
What about income tax? Self-assessment income tax and CGT receipts showed a 4.3% rise in January compared with a year earlier which was good, though not as good as the OBR expected. Income tax and CGT receipts for 2012/13 so far are 0.2% lower than in the corresponding period of 2011/12.
Given this, it is surprising January’s budget surplus was so high. But £3.8bn of it was the transfer of the interest received on gilts purchased under the Bank of England’s quantitative easing programme from the Bank to the Treasury, otherwise known as financial jiggery-pokery. The Treasury also benefited from reasonable VAT receipts and a drop in the interest bill on government debt.
The OBR struck a downbeat note. The auction of the 4G mobile phone spectrum raised only £2.34bn, rather than the £3.5bn it had expected. It had also assumed that government departments would under-spend by rather more this year than they appear to be doing and some elements of spending continue to rise very strongly. Social security benefits and tax credits in January were up a huge 8.4% on a year earlier. The fact that after all the adjustments public borrowing in the first ten months of 2012/13, £97.6bn, was £5.3bn up on a year earlier, means there is work to be done. The deficit in the final two months of the fiscal year will need to be £6.4bn lower than a year earlier to meet the OBR forecast.
Can it be done? Unfortunately we are now in the dark until Budget day, with no more official figures for the public finances due before then, and the full 2012/13 picture not being available for a month after that. All is not entirely lost. There has been a pattern recently for the initial borrowing numbers to be revised down quite quickly, so the January could yet be better than initially reported. There is a blurring between January and February, particularly for self-assessment receipts, which could also help.
But the chancellor would be pushing it to declare again that this year’s deficit will definitely be down. His task will be to present credible numbers to show that any overshoot will be modest, and that his deficit-reduction strategy has merely stalled, not been blown off course. Whether the markets and the ratings agencies believe him is the big question.
David Smith is economics editor of The Sunday Times
