George Osborne faced a bruising setback last night as Britain suffered a second downgrade to its once-coveted top credit rating.
International agency Fitch stripped the United Kingdom of its gold-plated AAA status just as the country teeters on the brink of an unprecedented triple-dip recession.
Rival agency Moody’s has already downgraded the Government’s credit score. It leaves Standard & Poor’s as the only major ratings agency to rate the UK as an AAA country.
Worrying: Britain's credit rating has been downgraded this evening by a leading international ratings agency. The Bank of England is pictured
Fitch blamed ‘a weaker economic and fiscal outlook’ for Britain for its decision, rounding off a dismal week for the Chancellor.
The International Monetary Fund warned he was ‘playing with fire’ by pressing ahead with austerity before the recovery gets going while incoming Bank of England governor Mark Carney branded the UK a ‘crisis economy’.
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But a defiant Mr Osborne made it clear he is ready to defend his plans aggressively when IMF inspectors arrive in London next month for the annual health check of the UK economy.
It is thought the Washington-based Fund is preparing to call for a relaxation of the austerity plans – a recommendation the Chancellor is prepared to defy.
Mr Osborne said he was not ‘about to restart the consumption boom’ that took place under Labour.
Attack: Shadow chancellor Ed Balls, left, said the downgrade was a 'humiliating blow' to Prime Minister David Cameron and Chancellor George Osborne, right
DOWNGRADED NATIONS
France - Was stripped of its AAA rating in November 2012, despite President Hollande's pledge of reforms. Moved to the Aa1 rating, Moody's highlighted the 'structural challenges' as the main reason for the downgrade, such as high unemployment and lack of competitiveness.
Spain - Standard & Poor cut Spain's credit rating by two notches to BBB- in February 2012 after citing the economic conditions severely limited the government's options.
Italy - Moody's downgraded Italy's rating from A3 to Baa2 on concern that deteriorating financial conditions in Europe will lead to a sharp rise in borrowing costs.
Portugal - Their credit rating was downgraded to the same level as Spain in 2012, BBB-, which is below the investment level, one level above junk status.
USA - Their rating was downgraded to AA+ from AAA for the first time, which was seen as a symbolic blow to one of the great powers. Fears over how the national debt could be lowered was seen as a key factor.
Greece - The struggling country has actually seen its status raised - however it was rock bottom at 'selective default' and is now at B- in light of its determination to cut spending, as well as the willingness of other eurozone countries to help out.
Slovakia, Slovenia and Malta have also seen their ratings downgraded in the last two years.
He said the main problems in the global economy were in the eurozone and that Britain has taken decisive action to start a recovery.
In particular the Government was acting to restart the housing market through its Help to Buy scheme, while its Funding for Lending Scheme would lower the cost of borrowing to homeowners and small and medium-sized firms.
And he revealed that Britain is taking legal action at the European Court of Justice to fight the effort by 11 European countries, including Germany and France, to impose a financial transactions tax on the banks.
Britain fears that this could jeopardise the success of the City of London.
Official figures next week will reveal whether Britain has suffered a triple-dip recession over the winter.
The economy shrank by 0.3 per cent in the final quarter of last year and another slump in the first three months of 2013 would officially herald a third recession since 2008.
Mr Osborne – who admitted that at times he was ‘almost overwhelmed’ by emotion at Lady Thatcher’s funeral – said criticism of his policies had been embraced by those ‘who are opposed to dealing with Britain’s deficit and debt’.
Shadow Chancellor Ed Balls said the Fitch downgrade showed that Tories were ‘failing their own test’, having made preserving Britain’s credit rating a key test of their economic policy before the election in 2010.
But Labour was in chaos last night over claims it plans to fight the next election on a pledge to rack up yet more debts to boost public spending.
Mr Balls refused to rule out rejecting Coalition budget limits from 2015 onwards.
He is among senior Labour figures said to believe there is a growing consensus in favour of more debt-funded investment in public works and housebuilding.
But the dwindling band of Blairite MPs are said to be horrified by the idea and insist that the party must commit to staying within the Tories’ spending limits.