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Last updated: February 23, 2013 6:51 pm
Moody’s, the credit rating agency, downgraded Britain one notch to double A1 late on Friday in a move Labour branded a “humiliation” for George Osborne.
As news of the decision filtered through Westminster on Friday night, the chancellor insisted he would stick by his cuts programme, which is aimed at eliminating the current structural deficit by 2018.
Mr Osborne said: “Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.”
Danny Alexander, the Liberal Democrat Treasury chief secretary, defended the government’s handling of the economy and pledged his party’s continuing support for spending cuts.
Mr Alexander told the BBC on Saturday: “This is disappointing news ... [but] the credit rating agencies are one benchmark amongst many in terms of the economy.”
Moody’s delivered a gloomy forecast for the UK’s growth, predicting that stagnation could last at least until 2015. The agency said in a statement: “The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade.”
Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it
- George Osborne
But it has placed the country on a stable outlook, minimising the risk of imminent further downgrades. The agency said: “The stable outlook ... reflects Moody’s expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK’s debt trajectory.”
The move is unlikely to have an immediate impact on government spending. The UK’s cost of borrowing has risen in recent months as markets adjusted for the downgrade, which was widely predicted. But the interest rate the government pays on its debt remains below much of the rest of Europe.
Nevertheless, it is highly damaging for the chancellor, who pinned much of his economic credibility on maintaining the triple A rating. Mr Osborne said in 2010: “Our first benchmark is to cut the deficit more quickly to safeguard Britain’s credit rating.
A humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the test of their economic and political credibility
- Ed Balls, shadow chancellor
“Protecting the credit rating will not be easy ... [but] we will protect Britain’s credit rating and international reputation.”
A year earlier, when the UK was put on a negative outlook, Mr Osborne called for the Labour government to hold an early election.
Ed Balls, Labour’s shadow chancellor, said on Saturday: “This credit rating downgrade is a humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the test of their economic and political credibility.
“There has been no growth now for two years, our deficit is getting bigger ... the plan has not worked. This is why the chancellor is fast running out of credibility.”
But Mr Alexander insisted: “Of course it’s been slower than expected, but I think we are making progress down the right road.”
Business leaders call for growth budget
The British Chambers of Commerce said it was time for the chancellor to draw up a budget for growth.
“The fact that the ratings spell has been broken allows the Chancellor to be braver on growth,” said John Longworth, director general of the British Chambers of Commerce. “The Prime Minister and the Chancellor will have to look into more radical measures in the next six months, to stimulate exports, generate infrastructure development and create a business finance environment which favours enterprise and growth.”
The Federation of European Employers said the UK government should have taken earlier action to avert the Moody’s downgrade.
“This is a government of parochialism and caution where the bigger picture has been lost in a fog of pettiness,” said Robin Chater, secretary-general of the federation.
“To focus on economic growth and the key to growth – and the UK’s huge balance of payments deficit in goods – is to focus on manufacturing. The UK could regain its manufacturing strength quickly if the UK established the right climate for investment.”
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