Chancellor George Osborne defended the Government's austerity package today after Britain 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 told BBC Radio 4's Today programme: “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% 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.
He said: "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.
"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."
Mr Balls told Today that governments' deficits needed to be slashed, but added: "That means tough decisions but unless you've got growth, if your plan is unbalanced, it becomes self-defeating and today is the first evidence that even the ratings agencies are waking up to the fact George Osborne's plan's not working."
He said ratings agencies' statements were "a weather vane" showing "which way the wind is blowing".
The countries which saw their credit rating downgraded by Moody's were Italy, Malta, Portugal, Slovakia, Slovenia and Spain.
It came as the Greek government was challenged by the EU to "sell" its latest austerity deal to the public and end a "spiral of unsustainable finances" after rioters wreaked havoc on the streets of Athens in response to more cuts.
Mr Osborne also insisted that the coalition was "pro-business" despite the row which led to RBS chief executive Stephen Hester giving up his annual bonus and the bank's former boss Fred Goodwin being stripped of his knighthood.
"We are a pro-business Government, we are cutting business taxes in order to make Britain an attractive place to start a business, run a business and employ people," said the Chancellor.
"A fundamental part of the free market is that, yes, you get rewards for success - and we encourage that in Britain and not an anti-business culture - but also there shouldn't be rewards for failure and if businesses fail, including banks, they should go bust."
He added: "We draw a distinction between sorting out the mess in the banking system and this relentless attack on anyone who makes any money out of a successful business and out of successfully employing people.
"That is dangerous for Britain because it will mean people are put off coming here and setting up businesses."