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Jeremy Cook Headshot

So What Did We Learn From the Autumn Statement?

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George Osborne delivered a sombre assessment of the state of the UK economy this week in his Autumn Statement. Although he could arguably be said to have glossed over some of the details, the Chancellor made no bones about it - we're not in good shape. However, there weren't really any surprises to speak of in the content of his speech.

The market expected cuts to growth and that is what we got. Likewise news of rising debt and an increased period of austerity did not come as a surprise to sterling markets, with both the pound and the yield on UK debt remaining largely ambivalent to the Chancellor's speech.

The fact is that the poor growth - Q3 aside - that the UK has been saddled with throughout the year made the Chancellor's task easier in some ways. He attempted to pull some 'rabbits out of the hat' in the form of lower corporation tax and the permanent delay of a planned 3p increase in fuel duty. These measures were welcome, but they failed to mask the grave nature of his message.

This was an Autumn Statement aimed at maintaining the status quo and, politically, maintaining the AAA rating. Within the first 2 minutes of his speech the Chancellor was extolling the benefits of the UK being a 'safe haven', with interest payments on our country's debt falling by £33bn due to the fall in gilt yields; an amount equalling the budget of the Ministry of Defence. To jeopardise our rating would be to place the future of the UK economy in danger, he said... but would it?

Our fiscal position and lack of growth would have seen us lose our rating a decent time ago had we been part of the Eurozone. The independence of our central bank and the essential control of our own currency has insulated us against much of the fallout of the crisis. The only real market consequence has been that the outlook on our credit ratings has been placed as 'negative' by both Fitch and Moody's; two of the three largest ratings agencies.

However, in its most recent assessment of the UK economy back in September, Fitch accounted for its negative outlook on the basis that weaker growth twinned with debt rising close to 100% as proportion of GDP would put pressure on our AAA rating.

This week's assessment from the Chancellor and the Office of Budgetary Responsibility will be viewed as optimistic by those in the market, including those at the rating agencies. For example, I believe that the expectation of 1.2% growth next year is around double what eventually will come to pass. On this basis the AAA goose is cooked.

What this government must realise is that the preservation of the AAA rating is not the be-all-and-end-all. France's downgrade from AAA by S&P at the beginning of the year saw the euro rally and in the months since has seen yields come lower to around 2%, only 20bps higher than that of the UK's. The yield on its debt due to be repaid in 5 years' time hit a record low this morning, hardly a sign that the market is getting increasingly concerned about the French's ability to repay their debts.

It also follows that if the US, the printer of the global reserve currency and the largest economy in the world, is no longer viewed as an AAA entity, then nobody should be. The quicker the government revises policy away from not slaying a sacred political cow the better.

The glaring fact about the Chancellor's latest figures is that we are on track to have the worst deficit in the industrialised Western world by 2016. The Chancellor warned us that the "road is hard". However, someone should remind him that taking the right road in the first place is also a very good idea.