Chancellor defends austerity route

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Chancellor George Osborne defended the Government’s austerity package yesterday after the UK was threatened with the loss of its AAA credit rating amid fears over weaker growth prospects and potential shocks from the eurozone crisis.

Ratings agency Moody’s put the UK on “negative outlook” last night, increasing the chance of the country being stripped of its cherished status.

Shadow Chancellor Ed Balls said the move was “a significant warning” and urged the Government to spark economic growth, but Mr Osborne said it was “a reality check for anyone who thinks Britain can duck confronting its debts”.

The Chancellor said: “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.

“If people don’t invest in our economy, you don’t get growth and you don’t get jobs.

“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.”

Moody’s said it foresaw three main risks to the UK’s top rating, the first being a combination of 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.

The AAA rating “continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area”, it noted.

Significant structural reforms meant the economy was expected to return to 2.5 per cent trend growth rate even if more slowly than previously anticipated, Moody’s said.

It added: “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.”

Mr Osborne admitted the UK’s weaker growth prospects were “a challenge”, but denied he had “abandoned growth”.

He added: “If you don’t have confidence in a country’s ability to pay its debts - as you have seen with plenty of other European countries - then you get negative growth, rising unemployment and no prospect of recovery.

“I don’t see this false choice between growth and dealing with your debts. If you don’t deal with you debts, you will not have growth.”

He said Moody’s statement was “the clearest possible warning” that scrapping or slowing deficit reduction would lead to “an immediate downgrade” of Britain’s rating.

Mr Balls described the agency’s move as “a significant warning” and urged the Government to spark economic growth. The Morley MP added: “With our economy now in reverse, unemployment at a 17-year high and £158bn extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is growing by the day.”

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