Slid­ing scale

Why the rat­ings agen­cies could be right about Bri­tain Rus­sell Lynch

The Daily Telegraph - Business - - Front Page - RUS­SELL LYNCH

Adam Smith put it best al­most 300 years ago when it comes to the cru­cial ingredient­s which make things tick in a mod­ern econ­omy. Nearly 20 years be­fore he put quill to pa­per on The Wealth of Na­tions, he wrote: “Lit­tle else is req­ui­site to carry a state to the high­est de­gree of op­u­lence from the low­est bar­barism, but peace, easy taxes, and a tol­er­a­ble ad­min­is­tra­tion of jus­tice; all the rest be­ing brought about by the nat­u­ral course of things.”

Later on, in Wealth, he ex­panded on the theme to stress that “com­merce and man­u­fac­tures can sel­dom flour­ish in any state in which there is not a cer­tain de­gree of confidence in the jus­tice of govern­ment”. What Smith is talk­ing about here is the in­sti­tu­tional strengths of a na­tion which un­der­pin eco­nomic growth.

It was the out­go­ing chair­man of the Of­fice for Bud­get Re­spon­si­bil­ity, Robert Chote, who brought that Smith quote to mind at the end of a with­er­ing pre­sen­ta­tion of the risks to the pub­lic fi­nances. As a former jour­nal­ist never shy of speak­ing dur­ing his stint as the Govern­ment’s of­fi­cial watch­dog, you didn’t have to read too far be­tween the lines.

The chair­man re­marked that “more now than ever, it is im­por­tant to value in­sti­tu­tions that can give in­vestors and cit­i­zens confidence in good govern­ment and good eco­nomic man­age­ment”, high­light­ing a “non­par­ti­san civil ser­vice, an in­de­pen­dent cen­tral bank, ro­bust reg­u­la­tory agen­cies and a fis­cal watch­dog em­pow­ered to serve the pub­lic and Par­lia­ment”.

Plung­ing debt in­ter­est costs will al­low Rishi Su­nak, the Chan­cel­lor, to sell more than £500bn of gilts in the cur­rent fi­nan­cial year to pay for the Covid-19 cri­sis. But the OBR chief ’s part­ing shot was a clear hint that things may not al­ways be so. In a world where both pub­lic and pri­vate debt is soar­ing, the risk that in­ter­est rates will creep higher on our £2 tril­lion debt pile is also greater. Hence the im­por­tance of in­sti­tu­tions and gov­er­nance.

Close watch­ers of sov­er­eign debt markets say in­sti­tu­tional strength tends to be one of the sav­ing graces for ad­vanced economies with low trend growth and very large debts such as the UK. But ours has di­min­ished, ac­cord­ing to Moody’s, which has had the UK’s over­all rat­ing on a neg­a­tive out­look since last Novem­ber.

Moody’s still has praise for our courts sys­tem, a cred­i­ble cen­tral bank and a “highly qual­i­fied” civil ser­vice. But be­fore the Brexit ref­er­en­dum in 2016, the UK re­ceived its high­est pos­si­ble score for in­sti­tu­tional strength. Now it is a much more mid­dle of the road “a1” rat­ing. To put that into con­text, the agency rates our in­sti­tu­tions and gov­er­nance at a lower level than ev­ery sin­gle mem­ber of the G7 ex­cept Italy, at “a2”: we are one notch above a country con­sis­tently rated as one of the most cor­rupt in Europe.

Why has the Moody’s rat­ing drifted south? Its view is that the pre­dictabil­ity and ef­fec­tive­ness of eco­nomic and fis­cal pol­icy have “di­min­ished” following the Brexit vote. The com­plex­ity of the chal­lenge (as un­der­scored by the bliz­zard of cus­toms pa­per­work announced last week) “dom­i­nates pol­i­cy­mak­ing and leaves limited po­lit­i­cal cap­i­tal and civil ser­vice ca­pac­ity to ad­dress other chal­lenges re­lat­ing to the UK’s growth po­ten­tial and weak pro­duc­tiv­ity growth”. It isn’t just Moody’s either: Stan­dard & Poor’s says “desta­bil­is­ing shifts are pos­si­ble and pol­icy pre­dictabil­ity has re­duced in re­cent years”.

All in all, you wouldn’t pen­cil in now as the best time to launch a full-blooded at­tack on the civil ser­vice. Hence some of this Govern­ment’s moves dur­ing the pan­demic – the de­fen­es­tra­tion of Sir Mark Sed­will, the Cab­i­net Sec­re­tary, for ex­am­ple – have been sur­pris­ing, to say the least. The ap­point­ment of Brexit ne­go­tia­tor and long-term John­son ally David Frost as our new na­tional se­cu­rity ad­viser, de­spite no ex­per­tise in the field, also falls into that cat­e­gory. In the back­ground, the PM’s spe­cial ad­viser Do­minic Cum­mings talks about the “hard rain” ready to pour down on the civil ser­vice, when go­ing to war on White­hall at this junc­ture feels like re­build­ing an en­gine on an air­liner at 35,000ft while fly­ing through ex­treme tur­bu­lence.

What about the courts? An in­de­pen­dent ju­di­ciary is one of the country’s crown jew­els and the English le­gal sys­tem is so well­re­garded that around 70pc of all cases heard in­volve a for­eign claimant or de­fen­dant. So more eye­brows were raised among rat­ings agen­cies by the Con­ser­va­tives’ man­i­festo pledge for a Con­sti­tu­tional, Democracy & Rights Com­mis­sion “to re­store trust in our in­sti­tu­tions” weeks af­ter the Govern­ment’s Supreme Court de­feat over its at­tempt to pro­rogue par­lia­ment last Septem­ber.

En­sur­ing ju­di­cial re­view is “not abused to con­duct pol­i­tics by an­other means or to cre­ate need­less de­lays” smacks of Don Cor­leone com­ing for his en­e­mies. It im­plies the com­mis­sion’s re­sults have al­ready been de­cided. Is it “trust in our in­sti­tu­tions and in how our democracy op­er­ates” we want, or in­sti­tu­tions that can be trusted to de­liver the right re­sult?

At­tor­ney Gen­eral Suella Braver­man’s pre­vi­ous com­ments that the “del­i­cate re­la­tion­ship be­tween law and pol­i­tics is off-bal­ance” and her talk of tak­ing back con­trol “not just from the EU, but from the ju­di­ciary” raises more doubts. Braver­man ar­gued rightly that restor­ing the sovereignt­y of Par­lia­ment is a key ben­e­fit of Brexit, but the whole point of the Supreme Court’s pro­ro­ga­tion de­ci­sion was that the ex­ec­u­tive’s act pre­vented the abil­ity of that very Par­lia­ment “to carry out its con­sti­tu­tional func­tions with­out rea­son­able jus­ti­fi­ca­tion”. The judges de­fended the in­sti­tu­tion of Par­lia­ment; it was just that the Govern­ment didn’t like Par­lia­ment.

The OBR reck­ons the UK’s debt in­ter­est bill has dropped by more than £50bn since March alone, and as long as it re­mains low, Down­ing Street is un­likely to give a fig what the rat­ings agen­cies think. Even if the UK is down­graded in the months ahead, as is likely, the pain would only re­ally kick in if gilts lose their in­vest­ment-grade sta­tus and there is no chance of that in the near future. But as the Trea­sury em­barks on draft­ing its sixth set of fis­cal rules in a decade and the bor­row­ing piles up to pay for the pan­demic, min­is­ters should take more care of the pil­lars of the Bri­tish state rather than bring­ing them down brick by brick. Confidence in those in­sti­tu­tions, as Chote put it, “is hard to build and all too easy to erode”. If too much da­m­age is done, we might all pay a higher price – quite lit­er­ally – in the longer term.

Rishi Su­nak plans to sell £500bn of gilts in the cur­rent fi­nan­cial year to pay for Covid-19 cri­sis

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