by Stephen McPhie, CA
Partner, RSD Solutions Inc.
U.S. politicians are playing roulette with that country’s AAA debt rating with their inability to agree raising the debt ceiling along with meaningful deficit reduction measures.
Last year the UK enacted meaningful deficit measures with a harsh austerity program and received plaudits from certain international institutions including the IMF for its actions. The AAA debt rating was thought to be secure and medium term growth prospects bright. However, Tuesday’s Daily Telegraph reports that this rating is now in jeopardy due to [1] lower than expected growth. It is rumoured that the Prime Minister wants the Chancellor to stimulate the economy somehow although he also says that further stimulus is unaffordable. What would change of course do to the market perceptions of the country and its credit rating? Probably nothing positive!
Of course, the cause of all this is mass irresponsibility on the part of politicians in many countries over several years. They can’t resist spending other peoples’ money. Furthermore, they only have a short-term vision (if any at all) - their outlook generally stretches until no further than the next but one election, which usually means an absolute maximum of 8 years. That usually leaves someone else to pick up the mess with those that caused it are often hailed as wonderful and visionary.
Personally, having lived in Canada during the deficit and debt ridden years in the 1980’s and 1990’s and coming to London in 2000, I was horrified by Gordon Brown’s 2001 budget that turned the spending tap wide open and set the UK’s fiscal health on course to where we know it ended up. The opposition was too timid to mount any significant attack and essentially ended up buying into the big spending – until the political mood changed and they changed with it. I remember telling anyone who would listen that this was fiscal madness and would end in tears sooner or later. However my audience was small as nobody listened. Good times were rolling along on a sea of debt, both public and private.
There is no easy solution and no painless solution to all of this. Deficit reduction (let alone any thought of debt reduction) reduces growth at a time of moribund growth. Stimulus might provide short relief at a cost of higher future interest costs and higher inflation and result in more difficult decisions later. In fact, as fiscal situations worsen, decisions are taken away more and more from politicians and dictated more and more by the market.
