Osborne defends cuts as UK warned on credit rating

Chancellor George Osborne has defended continued spending cuts following a warning that the country's top credit rating may be downgraded.

Ratings agency Moody's put the UK on "negative outlook" due to the risk the eurozone crisis could affect growth and thus its efforts to reduce debts.

Labour said the government should ease off on austerity measures because they were "sacrificing" growth and jobs.

Mr Osborne disputed this, saying the UK "had to deal with its debts".

In its statement, Moody's said: "Any further abrupt economic or fiscal deterioration would put into question the government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16."

The change to negative outlook implies a 30% chance of the UK losing its AAA credit rating within 18 months.

A lower credit rating could make it more expensive for the government to borrow money.

Prime Minister David Cameron said the UK's credit rating "matters because the most important thing is to keep interest rates low, to keep mortgage rates low".

Reality check

Moody's said it expected the government to meet its target of beginning to bring down net public sector debt by 2015-16.

It also forecast that the UK's debt would peak later, and at a higher level, than most other countries with the top triple-A rating.

The chancellor took the credit rating agency's comments were an endorsement of the government's approach.

"It was a reality check for the whole political system that Britain has to deal with its debts, that we can't waver in the path of dealing with our debts," UK chancellor George Osborne told the BBC.

"This is yet another organisation - in this case a credit ratings agency - warning Britain that if we spend or borrow too much we're going to lose our credit rating," he added.

Shadow chancellor Ed Balls stressed that the government was not concentrating enough on economic growth - which leads to higher tax revenues and lowers the outlay on benefits - crucial to dealing with the UK's deficit.

"Unless you have 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 is not working," he told the BBC.

"I have said consistently and in the face of the views at times of ratings agencies, is that without growth, without jobs, you can't get the deficit down," he added.

'Little impact'

BBC economics editor Stephanie Flanders points out that the downgrade warning comes from just one of the three credit rating agencies and suggests it is unlikely to have much of an impact on people in the UK.

But the move is important for the chancellor, she says, who focused on the importance of keeping a AAA rating when explaining the need for reductions in spending.

"One of the key reasons for cuts, for austerity, was to hold on to our credit rating, so it is hard for him to say it doesn't matter, as he has set so much store about it," our correspondent says.

Leading economist Jim O'Neill suggested that credibility with the markets in itself was not enough.

"The key issue is whether growth can be resurrected because of events outside of their control," Mr O'Neill, from Goldman Sachs Asset Management told BBC News.

"If you can't get growth, then by constantly tightening fiscal policy, it is not going to help growth.

"It might give some credibility, but to really, ultimately, save our credit rating we need credible fiscal policy and some growth."

'Well-supported'

Like personal credit scores, sovereign credit ratings are an indication of how risky it is to lend money to a country.

A high credit rating from the three main agencies, Moody's, Standard & Poor's and Fitch, implies that borrowing to fund public spending will be relatively cheap.

If the rating is lowered this can push up the interest rate on new borrowing for governments. But this is not always the case.

"It's all relative," said Laura Lambie from William de Broe

"We did see America being downgraded, they lost their AAA rating last year and that didn't have a huge detriment, in actual fact it was reasonably positive they are still seen as a safe haven when compared to other countries such as Greece and Spain, and I suspect Britain will be the same." she added.

The UK's "negative outlook" is the lowest level of warning offered by the agency - and can be followed by a "negative watch" implying a more than 50% chance of downgrade.

The agency said the UK faced three main risks to its top rating; slower growth and the possible impact on spending cuts, a sharp rise in borrowing costs due to inflation or a new crisis in the banking sector.

However, the agency noted the UK "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".