This downgrade was, therefore, expected and leaves only Canada and Germany with AAA ratings. In theory it means that UK debt will be more expensive however since it was expected it is likely to be already included in the cost of borrowing so it will probably not make any difference. When the USA and France lost their AAA ratings their borrowing costs actually went down!
The bottom line would therefore seem to be that it will not actually make any difference to the economy. In fact it may actually be good news since the pound may drop a bit which means that exports become cheaper and assist the government’s strategy to export out of reession.
However, politically it is bad news for the chancellor, George Osborne, because he has made statements that “We will maintain that AAA rating” and indicated that keeping the AAA rating was the test of his economic credibility.
Labour are obviously scoring as many political points as possible this morning. I listened to an interview with Ed Balls, Labour’s shadow chancellor, on Radio 4 and I am still not sure that Labour have a valid alternative plan since their spending plans need to be funded and it seems that they would need to be funded by more borrowing.
As described above I don’t believe that the downgrade actually changes anything from an economic point of view so I dont believe that there are any economic drivers for a change to the current strategy. It is only the politics of the downgrade that is triggering a call for a change in economic strategy. Obviously the economy and politics are linked so I think that it is going to be difficult few days for the chancellor but I don’t believe it should actually result in a change of economic policy and certainly should not result in more borrowing.