As reported in The Times;
“Britain will take “several years” to get back its AAA credit rating, Kenneth Clarke warned yesterday as the Tory Right called on George Osborne to change direction.
Backbenchers said that the Chancellor should cut spending further, and reduce taxes and fuel duty in the wake of the ratings agency Moody’s downgrading Britain to AA1. However, Vince Cable, the Business Secretary, said that a “slash and burn” policy would be “utterly foolish and counterproductive” and would not be taken up by the coalition.
Mr Clarke, the Minister without Portfolio and former Chancellor, backed the approach adopted by the US, which lost its AAA rating in 2011. “The Americans, like us, are going to persist with sensible policies combining getting rid of the debt and deficit at the same time as stimulating growth and having an industrial strategy,” he said. “It is going to take several more years of this to get back not just our credit rating but to sensible growth.”
Asked if Mr Osborne should reconsider his approach, Mr Clarke said that the Government should stick to its policies, adding that no one could have foreseen the present position.
Lord Lawson of Blaby, also a former Tory Chancellor, said Mr Osborne had not lost “any authority at all” but he urged him to tread carefully.
“I hope there won’t be a run on sterling. I think it would be a very great mistake if anyone in the Government or Bank of England gave the impression we would like to see a further depreciation of sterling. That would not be clever, that would not be sensible, that would not be helpful.”
Mr Osborne shrugged off the downgrade over the weekend, insisting: “Far from weakening our resolve to deliver our economic recovery plan, this decision [by Moody’s] redoubles it. We will go on delivering the plan that has cut the deficit by a quarter and given us record low interest rates and record numbers of jobs.”
Labour branded the downgrade a “humiliating blow” for Mr Osborne and called for higher spending to boost the economy.
David Davis, the former Tory leadership contender, argued that Mr Osborne, who has made the rating central to his austerity programme, had been undermined. “In part we are seeing the consequence of rhetoric outdoing reality. We have taken a tough position on spending cuts but we haven’t delivered it. We need to embark on a real cuts strategy,” he said.
John Redwood, chairman of the Tory parliamentary economic affairs committee, said that the downgrade was a verdict on coalition policy and urged an immediate switch towards tax cuts and prioritised spending. “We need to get the top rate of income tax to 40p, to cut capital gains tax from 28p to 20p and to cut fuel duty,” he said. “In addition, we should change our priorities on spending by lifting our protection of overseas aid for two years and targeting benefits to those entitled to them.”
Dr Cable and other ministers tried to play down the loss of the prized rating as “background noise”. He admitted that the Chancellor had been eager to maintain it, but the reduction was “largely symbolic”. On BBC One’s The Andrew Marr Show, Dr Cable also hinted that investing in infrastructure, skills and science could boost the economy.
The downgrade will put further pressure on the pound, which slipped to $1.51 after Moody’s announcement on Friday evening and experts warned that there could be more aggressive selling when City traders return to their desks.
Sterling has lost 7 per cent of its value against the dollar and 6 per cent of its value against the euro since the start of the year. Analysts believe that it will fall further, adding to the pressure on household budgets. Gerard Lane, of Shore Capital, said that the downgrade and the falling currency would hammer home that “we as a country are not as rich as we think we are”.
The Tories were dealt a further blow yesterday when Lord Ashcroft, who has spent £10 million on the party, decided to withdraw funding for the next general election. The peer may still support individual candidates who share his views. A source close to Lord Ashcroft said: “He has done his bit.””