David Prosser: It is not Sorrell that the Chancellor needs to convince but our lenders

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The Independent Online

Outlook George Osborne was delighted with the affirmation for his Budget provided yesterday by the WPP boss, Sir Martin Sorrell. But the advertising guru was not the only one who had spent the night poring over the small print: the team at Moody's were also on the case and the conclusions they reached will have been rather less palatable for the Chancellor.

Of these two arbiters, it is the credit ratings agency with which Mr Osborne should be most concerned. Any Chancellor who allows himself to be held over a barrel by companies threatening to withdraw their tax domicile is on a hiding to nothing; WPP is on its way back, but HSBC, which now faces an even higher bank levy, looks ever more likely to leave.

The opinion of Moody's, on the other hand, has a material effect on the British economy. After all, the Chancellor says his determination to cut the deficit so speedily reflects the importance of keeping the markets sweet about Britain's ability to service our debt. Having crowed in his speech on Wednesday about the low interest rates Britain is asked to pay on this debt – a judgement on our creditworthiness – he cannot have been too pleased to hear from Moody's that our prized AAA credit rating may be vulnerable after all.

The problem, says Moody's, is not only that the Office of Budgetary Responsibility has not cut its forecasts for growth sufficiently – Moody's, for instance, reckons on 1.6 per cent growth this year rather than 1.7 per cent – but that the downside risks are significantly larger than the chances of the estimates being too low.

The Chancellor will say this only underlines the importance of his Plan A for deficit reduction – that the effort to convince Moody's and the other credit rating agencies that Britain is mending its way must be redoubled.

The alternative analysis is to point out that undershooting the growth forecasts will mean overshooting borrowing projections. The cuts to the former forecasts in the Budget have already seen the OBR downgrade the extent to which borrowing will be reduced over the term of this Parliament.

Away from the intellectual argument, there is real evidence piling up that the economy is continuing to stall. Look at those dismal retail sales figures published by the Office for National Statistics yesterday and listen to what Next and Sainsbury's say about the outlook for consumer spending. Then bear in mind that while the squeeze from inflation is already being felt, we have not yet begun to beaffected by most of the Government's austerity measures.

This isn't pretty. What Moody's said yesterday, in effect, was that the deficit reduction programme it had demanded from the Chancellor might, in any case, result in the downgrade it otherwise threatened. If that's how things turn out, what's the point of Plan A?