Chancellor George Osborne defended the Government's austerity package today after Britain was threatened with the loss of its AAA credit rating amid fears over weaker growth prospects and potential shocks from the eurozone crisis.
Ratings agency Moody's put the UK on “negative outlook” last night, increasing the chance of the country being stripped of its cherished status.
Shadow chancellor Ed Balls said the move was “a significant warning” and urged the Government to spark economic growth, but Mr Osborne said it was “a reality check for anyone who thinks Britain can duck confronting its debts”.
The Chancellor told BBC Radio 4's Today programme: “We can't waver in the path of dealing with our debts and here is yet another organisation warning Britain that if we spend or borrow too much we are going to lose our credit rating but, more importantly, what that leads to potentially is a loss of investor confidence in our economy.
“If people don't invest in our economy, you don't get growth and you don't get jobs.
“It's yet another reminder Britain doesn't have some easy route out of the economic problems that have accumulated over the past decade, it's got to confront those problems head-on and that's precisely what I intend to do.”
Moody's said it foresaw three main risks to the UK's top rating, the first being a combination of slow growth with “reduced political commitment to fiscal consolidation” or a “failure to respond” to worsening conditions.
Other dangers were “a sharp rise in debt-refinancing costs, possibly associated with an inflation shock or a deterioration in market confidence over a sustained period” or a fresh crisis in the banking sector.
The AAA rating “continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area”, it noted.
Significant structural reforms meant the economy was expected to return to 2.5% trend growth rate even if more slowly than previously anticipated, Moody's said.
It added: “Although Moody's sees rising challenges in achieving debt reduction within the timeframe that has been laid out by the Government, not least the possible impact of any future cutbacks on short-term growth, the rating agency believes the UK Government's response to negative developments late last year indicates its commitment to restoring a sustainable debt position.
“This suggests the UK's track record of reversing increases in debt is likely to continue going forward.”