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David Cameron comes to precisely the wrong conclusion after Moody’s strips Britain of Aaa

We told you that Britain’s loss of its Aaa rating was going to be a sticky political wicket for British prime minister David Cameron.

The British premier premised his Conservative party’s push towards cutting spending and reining in deficits—which, in fairness, it campaigned on—on a couple of goals. One was the somewhat amorphous objective of shoring up “confidence.” The behavior of the bond and currency markets suggest that confidence in Cameron’s course is starting to ebb. Cameron also justified spending cuts in part on preserving the country’s Aaa rating. Ratings agency Moody’s decision to tear off the Aaa tag from Britain leaves that justification in tatters.

On the one hand, you might say that Moody’s could have done the Conservatives a favor, offering them an opportune moment to reconsider a policy that is leaving the economy limping at best—and flirting with a triple-dip recession at worst. (For the record, a revision to GDP figures announced Wednesday shows that Britain did do slightly better in 2012 than first thought.)

But if there is an opportunity, Cameron is not seizing it. Whilst parrying questions in parliament Wednesday, Cameron argued that Britain’s loss of its cherished credit rating only suggests that the country should redouble its efforts to cut deficits. “I’m the one saying this credit rating does matter, and it demonstrates that we have to go further and faster on reducing the deficit,” Cameron told parliament, as Reuters reports.

We would direct Cameron to this section of Moody’s report:

Projected tax revenue increases have been difficult to achieve in the UK due to the challenging economic environment. As a result, the weaker economic outturn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, and is likely to continue to do so over the medium term.

Translation? Britain needs growth. And the single-minded focus on deficit reduction is hurting growth. And as a result, tax collections are down and that makes it more difficult to get the budget under control. This is the opposite of a virtuous circle. This is an economy swirling down the drain.

And it doesn’t have to be this way. Moody’s itself says that the UK is very credit-worthy. And the fact that Britain still has its own central bank and currency gives it a huge advantage over counterparts on the continent also struggling with heavy debt loads. But Cameron—or the people who elected him—have to realize that the UK won’t cut its way to prosperity.

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