The credit rating agency Moody's has put the UK economy on "negative outlook", raising the prospect that Britain could be stripped of its prestigious AAA status. The surprise decision on Monday night was attributed to the ongoing crisis in the Eurozone, but Moody's also said there were doubts about whether the UK government was on target to reduce the budget deficit.
Chancellor George Osborne said the assessment was a vindication of the Government's tough austerity measures and "a reality check for anyone who thinks Britain can duck confronting its debts".
But the decision to place Britain on a watch-list will be seen as a sign of failure on Osborne's part, amid doubts about whether the pace of spending cuts across government departments can be maintained.
Shadow Chancellor Ed Balls told the Today programme on Radio 4 on Tuesday morning: "Without growth, without jobs, you can't get the deficit down, and that's where we are.
"George Osborne said we must press on because it's the only way to keep our ratings. I fear what's happening here is the world is making the 1930s mistake. This austerity isn't working but the message is, plough on, dig a deeper hole.
"It's time people said this isn't working. Today is the first evidence that even the ratings agencies are waking up to the fact that George Osborne's plan isn't working."
Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece over stringent measures to secure a fresh bailout.
Explaining its decision on the UK's prospects, it pointed to "increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years".
"Any further abrupt economic or fiscal deterioration would put into question the Government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16," it said. It also predicted that the "high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure".
Chancellor George Osborne said on Tuesday morning: "For me it was a reality check for the whole political system, that Britain has to deal with its debts. If we spend or borrow too much, we're going to lose our credit rating.
"Of course I want growth and to see unemployment fall... but if you don't deal with your debts then you will not have growth.
Moody's said it foresaw three main risks to the UK's top rating, the first being a combination of ongoing 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.
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