George Osborne faces growing pressure from Conservative MPs and business leaders to produce a show-stopping growth Budget next month, amid fears that the limp economy is undermining the government’s austerity drive.

Moody’s placed the UK on a negative outlook on Monday, meaning the credit rating agency believes there is a one in three chance of a downgrade within 18 months.

While markets largely brushed off the warning, several Tory MPs told the Financial Times that they wanted to see either tax cuts or supply-side reforms to galvanise business in next month’s Budget.

Mark Field, MP for the Cities of London and Westminster, said the Treasury should accelerate its plans for credit easing while John Redwood, former cabinet minister, called for tax cuts for entrepreneurs.

John Longworth, director-general of the British Chambers of Commerce, added to the chorus, saying the coalition should “pull out all the stops” to drive growth through tax changes, cutting regulations and improving access to capital.

“Reforms to employment law and planning must be significantly speeded up and promised infrastructure projects must start on-site,” he said.

The pressure from Tory backbenchers and business highlighted the dilemma facing Mr Osborne as he prepares a March 21 Budget that will aim to revive growth without increased borrowing.

Peter Bone, a Tory MP, said it was time to find billions for urgent tax breaks for business, either through cutting the aid budget and European Union contributions or borrowing more.

“I’m suggesting funded tax cuts but there is also an argument for cutting taxes now to encourage growth with a risk of increasing the deficit in the short term because in the long term we would increase growth in the economy with a multiplier effect,” he said.

That is the argument repeatedly made by Ed Balls, shadow chancellor, who said again that Britain was repeating the mistakes of the 1930s. “I’m afraid our chancellor is still in complete denial about the state of the economy,” he said.

Mr Osborne said the rating agency warning was a “reality check” that Britain could not afford to “waver in the path of dealing with our debts”. The chancellor criticised those who would make the “false choice” between cutting the deficit and creating growth.

“The idea that I’ve abandoned growth is nonsense,” he said. “But the truth is this: that if you don’t have confidence in a country’s ability to pay its debts … you get negative growth.”

Mr Osborne’s dilemma is that to find the money for a big tax giveaway to business he would almost certainly have to borrow even more. Borrowing is already set to overshoot forecasts by £148bn over the course of the parliament.

“The Moody’s intervention is a salutary warning. This government planned to borrow £550bn over the five years if all went well,” said Mr Redwood. “I’ve always thought that was the limit of the kind of risk we could take … and now we have all this extra borrowing already.”

Mr Field said the lack of growth was inextricably tied to the deficit issue: “More than half of debt reduction was supposed to come from heroic growth assumptions which we are now undershooting,” he said.

Yet other funding options popular with Tory backbenchers, such as cutting the aid budget, are considered politically unpalatable.

Andrea Leadsom, a backbench MP, said companies could instead be helped by cuts to red tape which would not require extra money.

For the chancellor, however, who carried out a “growth review” a year ago to little obvious effect, there is no magic wand. “Britain doesn’t have some easy route out of the economic problems that have accumulated,” he admitted.

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