Chancellor says he 'cannot let up' after move by Moody's which opposite number Ed Balls calls 'humiliating'
The chancellor has insisted that he will not change course despite the downgrade of Britain's credit rating in which he invested great political capital in maintaining.
George Osborne said Britain's situation would get very much worse if the government changed course after Moody's changed Britain's rating from AAA to AA1. The chancellor said previously the rating agency's triple-A rating was an endorsement of his austerity policies.
As far back as February 2010, he told an audience of Tory activists: "What investor is going to come to the UK when they fear a downgrade of our credit rating and a collapse of confidence?" In the Tory manifesto, published weeks later, he said: "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a parliament."
Ed Balls ,the shadow chancellor, described the downgrade as a "humiliating blow" for Osborne who was "ploughing on regardless with a plan which is not working".
In an interview at 11 Downing Street on Saturday, Osborne said: "I think we've got a very clear message, a loud and clear message that Britain cannot let up in dealing with its debts, dealing with its problems, cannot let up in making sure that Britain can pay its way in the world.
"What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it."
Labour insisted the government had withdrawn demand from the economy which had slowed growth and increased the debt.
Balls said: "The chancellor said this [a credit agency downgrade] would be a humiliating blow and the first test of his policy was to avoid it, so clearly for him politically, it is a very, very bad moment.
"What the credit rating agencies are doing, though, is reflecting the reality and the reality is an economy which is not growing, a deficit which is getting bigger, families in real stress and a government which is ploughing on regardless with a plan which is not working – saying 'The medicine is not working, let's increase the dose of the medicine.' That is completely crazy economics."
Asked if he had broken his commitment to protect Britain's credit rating, Osborne said: "I've consistently argued that Britain has a debt and deficit problem, that we've got to tackle that head on, that we've got to take tough measures to do that and I think people understand that.
"In the end, the test of our credibility as a country is there every day in the markets when we borrow money on behalf of this country from investors all around the world. At the moment we can do that very cheaply with very low interest rates precisely because people have confidence that we have got a plan, we've got to stick to that plan and we are going to deliver that plan. What do they also say? That if we abandon our commitment to deal with that debt problem, then our situation would get very much worse and I'm absolutely clear that we must not do that."
Moody's warned that "subdued" growth prospects and a "high and rising debt burden" were weighing on the economy. It said it now expects the "period of sluggish growth" to "extend into the second half of the decade".
"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," the agency said.
However, the main impact could be political for Osborne, as rates paid by the US fell after Standard & Poor's reduced its credit score in 2011.
The chancellor's deputy, Danny Alexander, the Lib Dem chief secretary to the Treasury, played down the news. He said: "Of course this is disappointing news, but I have always said that the credit rating agencies are not the be all and end all. What in the end matters is the confidence that people who invest in this country have.
"We still command very low interest rates, historically low interest rates. This country has reduced its deficit by a quarter over the past two and a half years. Over a million jobs have been created in the private sector."
This quarter is crucial for the chancellor if the country is to avoid a triple-dip recession following the 2008 banking crisis which led to sharp reductions in growth in early 2009.
The economy contracted by a surprise 0.3% in the last three months of 2012 and if it shrinks again in the subsequent three months it would be regarded as once again in recession. Employment, though, ended 2012 at 29.7m – the highest number of people in work since records began in 1971.