The Chancellor’s conviction over his austerity programme was unabashed by doubts over Britain’s much-coveted AAA credit rating that surfaced on Monday.
As other country’s have struggled with sovereign debt and seen their credit ratings fall, Britain’s AAA credit rating – the highest possible – has been the poster-boy of the national austerity drive.
But when Moody’s, one of the international credit rating agencies, took a step towards downgrading the debt rating when they switched their assessment of the UK’s economic outlook to “negative” from “stable”, the Chancellor dismissed suggestions that it indicated the austerity measures were not working.
“For me it’s a reality check for the whole political system, that Britain has to deal with its debts,” the Chancellor said on Tuesday. Mr Osborne said that the assessment by Moody’s was “the clearest possible warning” that any departure from the severe austerity measures would lead to “an immediate downgrade”.
In a statement, Moody’s said: “The primary driver underlying Moody’s decision to change the outlook on the UK’s AAA rating to negative is the weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years.”
Moody’s said the country’s extensive trade and financial links with Europe make it highly vulnerable to the eurozone crisis.
Mr Osborne told the BBC Today programme: “We cannot 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.
“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.
“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 your debts, you will not have growth.”
Ed Balls, the Shadow Chancellor, said that Britain needed a plan for growth not just debt reduction, and it was this lack of growth that was the cause of the downgrade.
“Moody’s is clear in its statement that the primary reason for Britain’s negative outlook is ‘weaker growth prospects’, which are making it harder to get the deficit down,” he told the BBC.
“With our economy now in reverse, unemployment at a 17-year high, and £158 billion 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.
“That means tough decisions, but unless you’ve got growth, if your plan is unbalanced, it becomes self-defeating … today is the first evidence that even the ratings agencies are waking up to the fact George Osborne’s plan’s not working.”
The UK has always maintained its triple-A debt rating, which means demand for government bonds is high and borrowing costs are kept low.
The financial crisis has seen many nations lose their triple-A status in recent months, most notably the United States, which was cut by Standard & Poor’s (S&P) in the summer to AA+. Last month S&P downgraded France and Austria to AA.