Plunging debt interest costs will allow Chancellor Rishi Sunak 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 has “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 Cabinet Secretary Sir Mark Sedwill, 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 35,000 ft while flying through extreme turbulence.