It’s pretty clear how Key and English plan to spin their budget. They will use the bogeyman of a credit rating downgrade to justify doing what they want to do cutting contributions to the Superannuation fund and spending on core services like health and education. They’ll attempt to overshadow the cuts by making some spending announcements to probably (hopefully, finally) something to protect jobs like the Greens’ housing insulation plan and some â€˜new’ health programmes that comes out of the existing $750 million baseline increase.
My question is whether this credit rating downgrade threat is all it’s made out to be. First off, these credit ratings companies are the same ones who screwed up royally by assigning good ratings to the subprime mortgage debt so does anyone still listen to them?
Anyway, only one of the big three, S&P, has said there is any threat of our rating being downgraded. In fact, S&P isn’t that worried. All we have to do is get back into operating surplus within five years, which will happen in the boom that follows the recession (as long as we don’t do stupid things like cut taxes).
Moody’s thinks our government books are better placed to handle the recession than the US and UK.
The comparison is always made to Ireland, which was downgraded in March but we are no Ireland. We were lucky enough to have a government during the boom times that didn’t slash taxes as if the good times would last forever. Now, our debt might reach 45% of GDP by 2013 (don’t worry about projections further out than that, they’re meaningless) but Ireland’s will go past 70%, increasing at about twice the rate of our debt.
Finally, check out this the â€˜yield spread’ (difference in interest rates) on Irish and German debt.
The gap (which represents extra cost of borrowing to the Irish Government) increased before the credit downgrade. Serious lenders don’t react to downgrades they react beforehand to the information the ratings agencies base their decisions on. Actually, the gap has actually got smaller since the downgrade.
We’re not going to get a downgrade from the discredited credit agencies and it wouldn’t be the disaster it’s cracked up to be even if it were to happen.
My next post will look at the minimum the government needs to do to maintain existing public services but one final thought on credit ratings.
Ultimately, what the ratings agencies want to know is that we are serious about keeping our finances healthy in the long-term. Our government is considering stopping payments to the Superannuation Fund, a fund which is making huge returns and means we won’t have to increase taxes in the future to pay for superannuation. Now, do you think that’s going to strike those big shot financiers as savvy fiscal policy?