The obvious fragility of British credit

Moody’s Doesn’t Rate

By THEODORE DALRYMPLE

If the incompetence of the credit-rating agencies needed further proof, Moody’s recent downgrading of Britain would have provided it. It was not the downgrading that showed Moody’s incompetence, however; it was the high ranking that it had accorded Britain in the first place. Britain has been a bad long-term bet for years now. Anyone with the slightest instinct for economic affairs would long ago have foreseen the country’s poor outlook.

Indeed, a single speech in 2004 by Anthony Blair, the prime minister at the time, should have been sufficient to alert observers to the dangers. In the speech, Blair boasted that, after seven years in office, he had nearly doubled spending on public education and more than doubled spending on the National Health Service, Britain’s Soviet-style health-care system. He also promised that NHS spending would rise by another 50 percent over the next four years (a promise that, atypically, he kept). Though most of the money paid the wages of a growing number of government workers, Blair repeatedly referred to the spending increases as “investments.” So did Gordon Brown, his chief economics minister. Blair felt it unnecessary to provide evidence that this spending brought actual benefit, economic or otherwise, or to consider its possible costs. He spoke as if the money came from a generous extraterrestrial donor and not from higher taxes and government borrowing. A country with a government that cannot tell the difference between investment and expenditure is one from which lenders would best steer clear.

Three things might have alerted Moody’s, were it minimally competent. First, the government’s tax receipts did not cover its spending; even at the height of the booming 2000s, borrowing became necessary to make up the difference. Second, the boom itself was clearly the product of cheap credit, which led to asset inflation and overconfident private spending and borrowing. Finally, while taking on legions of new employees is easy for government, nothing is harder politically than to sack them when the money runs out. The means of meeting obligations disappear, but the obligations remain.

In other words, in an economic downturn—of the kind that Brown absurdly claimed to have banished forever—the whole house of cards would collapse. How could a company dedicated to evaluating credit not understand that?