UK's credit rating cut humiliating, Labour says

Labour has attacked the government's economic policy after the UK lost its AAA credit rating, but the coalition says it is "making progress".

Shadow chancellor Ed Balls said the downgrade was a "humiliating blow", and urged him to act fast to "kick-start our flatlining economy".

But Chancellor George Osborne said the government would continue taking "tough measures" to deal with the deficit.

Ratings agency Moody's cut the UK's top rate to Aa1.

The agency, which is the first to downgrade the country's rating since 1978, said expectations were that growth would "remain sluggish over the next few years".

It said the government's debt reduction programme faced significant "challenges".

Mr Osborne said the decision was "a stark reminder of the debt problems facing our country" and did not mean the government should change course.

However, speaking on BBC Radio 4's Today programme, Mr Balls said: "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.

"I have always said... that you should not set your policy by the credit ratings agencies. They have got things wrong in the past.

"But what matters is the underlying economic reality. There has been no growth now for two years, our deficit is getting bigger... the plan has not worked."

Mr Balls added: "In the budget, the government must urgently take action to kick-start our flatlining economy and realise that we need growth to get the deficit down."

But Mr Osborne said Britain's situation would get much worse if the government abandoned its "commitment to deal with that debt problem".

He said: "What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it.

"We've got to take tough measures to do that and I think people understand that."

Mr Osborne added the UK was still able to borrow money "very cheaply with very low interest rates" from investors all around the world.

This was "precisely because people have confidence that we have got a plan", he said. "We've got to stick to that plan and we are going to deliver that plan."

Earlier, Lib Dem chief secretary to the Treasury, Danny Alexander, told BBC News that losing the AAA rating was not a devastating blow.

"I would say this is disappointing news and that the credit rating agencies are one benchmark amongst many in terms of the economy, but actually our credibility as a country is tested every day in the financial markets."

He said the government's fundamental aim was to create jobs, which he said it was doing.

Mr Alexander insisted the government was trying to "deal with huge financial problems we inherited from Ed Balls and his colleagues and get the country back on track".

BBC political correspondent Alan Soady said the cut carried symbolism because, even in opposition, Mr Osborne had talked about the importance of reserving the UK's AAA rating, and protecting it was one justification for his deficit reduction plan.

The downgrade would therefore provide ammunition to the government's opponents, our correspondent said.

Scottish finance secretary John Swinney said the cut proved the UK's "vigorous austerity programme" was not working and confirmed "the utter failure of the UK government's economic strategy".

In announcing the ratings cut, Moody's cited the "challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament".

It said the UK's debts were unlikely to reverse until 2016, but that its outlook was "stable" - without the prospect of further downgrades - and its creditworthiness remained "extremely high".

The UK's net sovereign debt was the equivalent of 68% of the country's annual economic output, or GDP, at the end of 2012.

The country has experienced a double-dip recession since 2008. It grew in the third quarter of last year, boosted by the impact of the Olympics, but shrunk again by 0.3% in the last three months of 2012.

All three major credit agencies last year put the UK on "negative outlook", meaning they could downgrade its rating if performance deteriorates.

Germany and Canada are the only major economies to currently have a top AAA rating, as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.