25 February 2013
Last updated at 11:34 ET
George Osborne has said the government must “redouble its efforts” to tackle UK debts despite the loss of the UK’s AAA credit rating.
The chancellor said the downgrade was because of slow global growth and the difficult process of reducing debt, which he said must continue.
He was responding to an urgent Commons question from Labour, who say he is in “complete denial” about the situation.
Sterling fell to a two-and-a-half year low against the dollar before rallying.
The chancellor said there had not been “excessive market volatility” and the government would not deviate from its economic path.
Mr Osborne said he accepted the downgrade – made by ratings agency Moody’s on Friday – and the reasons for it.
Burt he blamed the weak global outlook and the last Labour government’s economic legacy and said the situation would be “much worse” if the coalition abandoned its efforts to reduce borrowing.
He told MPs the downgrade was a “stark reminder” about the level of debt that the coalition government had inherited from its Labour predecessor and ministers were not going to “run away” from the problem.
He said the AAA credit rating, which he has repeatedly said since taking office was a key benchmark of the UK’s economic credibility, was important but the economy was “tested” on a daily basis in the financial markets – including on Monday – and had “not been found wanting”.
Mr Osborne said it was “patently ludicrous” that the UK’s debt problems could be solved “overnight” and he said the deficit was down by a quarter since the election and interest rates on borrowing for both the government and consumers remained low.
“That ultimately is the choice for Britain – either we can abandon our efforts to deal with our debt problems and make a difficult situation very much worse or we can redouble our efforts to overcome our debts and make sure this country can earn its way in the world,” he said.
‘Cover for cuts’
But shadow chancellor Ed Balls said Mr Osborne had failed the “first economic test” he set himself as chancellor and was himself now “downgraded”. Borrowing was now rising as austerity measures and a lack of a growth plan hampered the recovery.
“What we see today is that he is in complete denial and offering more of the same failing medicine even now Moody’s agree sluggish growth is the main problem,” he added.
“Does he not now regret using the ratings agency as cover for his accelerated tax rises and spending cuts?”
Moody’s downgrade from AAA to AA1 included a warning that growth would “remain sluggish” over the next few years while the government’s debt reduction programme faced significant “challenges”.
Mr Osborne, who will deliver his fourth Budget next month, faced calls to resign from a handful of Labour MPs during his Commons statement.
However, Tory MPs rallied behind the chancellor and Andrew Tyrie, chair of the Treasury select committee, said the downgrade was of “limited value” given the ratings agencies “dismal record” of corporate and economic forecasting in the past.