Britain's gold-plated AAA credit rating was affirmed by a key agency today in a boost to Chancellor George Osborne's belt-tightening austerity measures.
Standard & Poor's (S&P) said the UK Government had the ability to "respond rapidly" to economic challenges as it confirmed both the rating and the country's "stable" outlook. The move comes after rival agencies Fitch and Moody's put the UK on negative outlook.
But the picture was not perfect as S&P warned the Chancellor's tough spending cuts would "drag" on the economy, while household spending will be dampened by sluggish wage growth, a fragile labour and housing market and high private sector debt.
However, the agency said if the Government's fiscal policy was to loosen, the UK could lose its coveted rating.
Mr Osborne said: "This is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times."
The Chancellor wants to eliminate the structural deficit - the share of the budget deficit that would remain after the economy recovers - by 2016/17.
The Government will achieve this by gradually lowering its borrowing through an £80 billion spending cut programme, as well as a series of tax reforms.
Affirming the rating, S&P said the UK had a "wealthy and diversified economy, fiscal and monetary policy flexibility, and adaptable product and labour markets".
It said the UK economy's capacity to "absorb shocks" has improved.
The household sector has developed a savings buffer and large corporations have accumulated substantial cash positions, S&P said.
S&P said it expects GDP growth of about 1.6% between 2012 and 2015 and will return to 2007, or pre-financial crisis, output levels in real terms in 2014.
S&P also expects Government to stick to its deficit-busting plans for the "near future".
The stable outlook reflected expectations that the Government will "continue to consolidate public finances", S&P said.
Weaker economic growth than currently forecast could also impact the AAA rating, S&P said.
Mr Osborne added: "The Budget showed we are ready to go on making the difficult decisions that are keeping our country safe. Once again we are reminded that those who want to spend and borrow even more would lead our country into an economic catastrophe."
The UK economy contracted by 0.3% in the final quarter of 2011 but is broadly expected to have scraped back into growth in the first three months of the year.
The tax and spending watchdog, the Office for Budget Responsibility, which sets official guidance for the Government, expects GDP growth this year to be 0.8%.
S&P shocked the markets last year when it lowered America's AAA credit rating by one level to AA+ while keeping the outlook at "negative".