While attention on this side of the pond has been focused on the sequester, the spending wars continue in Europe. Last week Moody’s stripped the British government of its AAA credit rating (The Guardian) The agency noted:

The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public and private sector deleveraging process.

Deleveraging refers to Chancellor George Osborne’s attempts to curtail deficit spending via an austerity program. But austerity is painful, taking money and demand out of the economy while the balance sheet is being fixed. The British dilemma illustrates the Keynesian trap of the modern welfare state: it overspends in good times (most notoriously in the final years of the Labour government), leaving nothing but a painful hangover and even more painful choices when times go sour.

The downgrade shook the currency markets and caused a run on the pound. But while the currency markets will no doubt regain their equilibrium, the British taxpayer is getting “no end of a lesson”, to use Kipling’s phrase, about the illusion that governments can create prosperity.

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