You can get 3/1 with PaddyPower that Osborne will not be Chancellor by end of year. twitter.com/MSmithsonPB/stâ€¦
— Mike Smithson (@MSmithsonPB) February 24, 2013
Is it three strikes and out?
In practical terms, the loss of the UKâ€™s triple-A credit rating with one of the three main agencies is unlikely to have much impact. France and the USA have both been through the same process without undue trauma, and besides, thereâ€™s enough information and interest in the sovereign debt of large countries that the ratings agencies tend to follow the market rather than lead it.
By contrast, the political effects of the downgrade are likely to be devastating. The government and George Osborne in particular have staked a considerable amount of credibility on the maintenance of the AAA rating and both have now been lost. Itâ€™s not simply the initial event; itâ€™s that unless thereâ€™s a change, Osborne is now going to have to try to explain why it didnâ€™t really matter after all. As Callaghan recognised on the devaluation of sterling in 1967 and Major came to realise about Lamont, following Britainâ€™s ejection from the ERM, this is a task thatâ€™s near to impossible.
The loss of the credit rating is an easy and obvious attack line for Labour (despite the agenciesâ€™ pre-election comments that the rating would be cut if the then-governmentâ€™s spending wasnâ€™t reined in). Osborne is poorly placed to respond.
This might seem unfair. In some ways, Osborneâ€™s been a reasonable Chancellor. The agreements on money hidden in tax havens, the overseeing of employment growth despite the poor GDP figures and the overall deficit reduction strategy are all positives. They are not, however enough. Were the credit rating issue the only problem, his position might be salvable; it isnâ€™t. In reality, itâ€™s the third serious negative he has to contend with.
The first â€“ and one he recognised before the 2010 election â€“ is that he doesnâ€™t come across well in the media. Given that the economy will be central to the political debate between now and 2015, thatâ€™s a major handicap the coalition and in particular the Conservatives have. Itâ€™s true that he and Cameron still compare favourably to Miliband and Balls in terms of economic trust (or did do so â€“ who knows how the polls will now move) but one thing the governmentâ€™s not been that effective at recently is in explaining the basis for its deficit-reduction policy: its inheritance and the inability of the country to live beyond its means. If the debate remains focussed on winners and losers, itâ€™s in trouble.
The second is the wholly self-inflicted political error of the top rate income tax cut. There may have been good economic reasons for it but in that single move, the government â€“ and particularly Osborne and the Tories â€“ undermined â€˜all in it togetherâ€™. It is extremely difficult to justify effectively why lowish earners should have pay frozen when those at the top are seeing pay cut. That the top rate is 5p in the Â£ higher than it was for most of Labourâ€™s time in office and that the 50p rate probably brought in little additional income is beside the point: the cut was and remains terrible PR.
After that, the loss of the AAA status â€“ one of the key measures on which Osborne asked to be judged â€“ ought to be the final nail in the coffin.
Moving or sacking him (or extracting a resignation) will be difficult but not doing so will be worse in the long run.
There are options in terms of replacements â€“ Hague, Hammond, Gove or May could all do the job, with May ticking the most boxes (her sometimes rocky ride at the Home Office has been more down to officialdom rather than political judgement) â€“ and in these things, itâ€™s best for a PM to take the initiative rather than end up being forced. Alternatively, were Osborne to offer his resignation, he may ultimately survive, as Callaghan did. Will he go? Not immediately, I suspect. There is the matter of the Budget to come and that may be a sufficient shield in the short term but the pressure is unlikely to subside and will find an outlet, one way or another.