George Osborne has insisted the government will continue its unpopular austerity programme despite coming under increased pressure as Britain's prized AAA credit rating faces a fresh threat.
After credit ratings agency Moody's put the UK's credit rating on "negative outlook", shadow chancellor Ed Balls said the news was a "significant warning" to the government.
But a defiant Osborne said on Tuesday morning: "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."
He told BBC Radio 4's Today programme: "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."
Labour pointed out when ratings agency Standard and Poor's put the UK on negative outlook in 2009 Osborne warned the country's "economic reputation" was on the line.
Ed Balls claimed on Tuesday morning Osborne had made a "mistake" to set policy according to credit ratings agencies.
"The one thing though they are is a weathervane for the way the wind is blowing and the fact is the wind is blowing now in a difficult direction for Britain because, as the report says, we don’t have growth in our economy," he told BBC Radio 4's Today programme.
"And let’s just remember, when we came off negative outlook in October of 2010, George Osborne said that was a vote of confidence. Now we are going back on to negative outlook, he still wants to say that is a vote of confidence. This is not a vote of confidence in what is happening in Britain because, as I have said consistently and in the face of the views at times of ratings agencies, is that without growth, without jobs, you can’t get the deficit down. That’s where we are."
In a statement released on Monday evening Moody's said they expected the UK's growth to return to trend.
Moody's said three scenarios could lead to a debt downgrade; years of slow growth couples with reduced "political commitment" to fiscal consolidation, an inflation shock or rise in the cost of paying back debts, or "renewed problems in the banking sector."
"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."
The ratings agency downgraded the credit rating of six countries Italy, Malta, Portugal, Slovakia, Slovenia and Spain and placed Austria and France's AAA rating on negative outlook.
Britain faces a one in three chance of having its AAA credit rating downgraded.Suggest a correction