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Friday
Feb122010

Raising the spectre of the dreaded credit downgrade

The temperature is starting to rise in the war or words between all three major political parties as the forthcoming UK election draws closer.

The subject at the heart of the debate over the last couple of weeks (and likely to remain there) is the state of the nation’s finances – more specifically how to handle the £178 billion debt. Only last week The Governor of the Bank of England estimated that the British economy had shrunk by a full 10 per cent. The result of which equates to annual lost tax revenue of around £140 billion.

Shadow chancellor George Osborne has said he wants a 'more solid' economy for Britain built on savings, enterprise and exports. 'We all want to see a stable, growing economy. The question is how we get there,' says Liberal Democrat Treasury spokesman Vince Cable, while Business Secretary Lord Mandelson, accused the Conservatives of 'wobbling around' under pressure.

The central issue of recent debate seems to be how to tackle public debt whilst at the same time not threatening the fragile economic recovery. The Conservatives, who came out fighting, with talk of a full-frontal assault on government borrowing seem to have softened their position recently.  'There is a limit to what you can do in a year,' Osborne told the BBC.

As part of their argument for radical action on spending the Conservative are quick to point out the negative impacts of a credit downgrade such as that suffered by Greece recently.  It is a move that has increased the cost of borrowing money there and only compounded their financial woes.

'We’ve seen in the case of Greece where this can lead... It’s a very dangerous thing to do,' Cameron told an audience at the World Economic Forum in Davos. 'The people of Greece are already suffering the cost of a loss of confidence in their economy, with an extra 3 per cent on the interest rates they pay to borrow.'

Whether the real or perceived threat of a UK downgrade has decreased or the Conservatives feel that going in too hard on spending would suffocate any recovery is hard to say. It's a fine balancing act for all the parties and for those who enjoy their politics the debate will make for fascinating viewing over the next few months.

 



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