George Osborne has warned there will be no let up in his plans to reduce the deficit after Britain was stripped of its prize AAA credit rating amid worries about weak growth and rising debt.
The Chancellor pledged that his resolve to stick to the Coalition's economic strategy is "redoubled" following the downgrade by Moody's, one of the biggest global credit ratings agencies, downgraded Britain.
He faced political flak, however, because he repeatedly staked his credibility on being able to stave off the downgrade, vowing before the 2010 general election: "We will maintain that AAA rating."
While Labour went on the attack, the party faced questions of its own after Ed Balls, the shadow chancellor, admitted borrowing would now be higher if he were in charge.
Mr Osborne insisted that the Coalition will not change course on the economy, saying the downgrade made it all the more important to stick to attempts to cut Britain’s deficit.
He said: "I think we've got a very clear message, a loud and clear message that Britain cannot let up in dealing with its debts, dealing with its problems, cannot let up in making sure that Britain can pay its way in the world.
"Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it.
"What do they also say? That if we abandon our commitment to deal with that debt problem, then our situation would get very much worse and I'm absolutely clear that we must not do that."
Asked if he had broken his commitment to protecting Britain's credit rating, he said: "I've consistently argued that Britain has a debt and deficit problem, that we've got to tackle that head on, that we've got to take tough measures to do that and I think people understand that.
"In the end, the test of our credibility as a country is there every day in the markets when we borrow money on behalf of this country from investors all around the world.
"At the moment we can do that very cheaply with very low interest rates precisely because people have confidence that we have got a plan, we've got to stick to that plan and we are going to deliver that plan."
Mr Balls told Radio 4's Today programme: "The economy has flatlined. There has been no growth now for two years, our deficit is getting bigger... the plan has not worked."
In a separate interview, on Sky News , Mr Balls called Mr Osborne a "quack doctor when it comes to the economy."
Mr Balls insisted that the economy would be in a better condition if the coalition had stuck to Labour's spending plans in 2010. However, he admitted he would currently be increasing borrowing if he was in charge.
"That is what I would do right now," he said. "I would slow the pace of deficit reduction. I would have an immediate stimulus in the economy."
In the wake of the shadow chancellor's interview John Penrose, the Conservative MP, demanded: "Can anyone think of a question where Ed Balls' answer would not be 'borrow more money'? No? Me neither."
Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, said the downgrade was "disappointing news."
However, he added: "Our credibility as a country is tested every day in the financial markets. We continue to command very low interest rates.
Credit ratings agencies were not the "be all and end all" but "one benchmark among many," Mr Alexander added.
Mr Osborne is braced for the Tory right to demand deeper spending cuts and possible tax cuts to stimulate the economy and address borrowing.
Mark Littlewood, director general of the Institute of Economic Affairs, said Mr Osborne should now take "immediate action" to cut the deficit.
"George Osborne should focus on making sufficient savings in public spending to implement a substantial programme of tax reductions," said Mr Littlewood.
"With the size and scope of the state in Britain at current levels it is no wonder our economy is so fragile."
Moody's said it had acted to downgrade Britain for the first time because of “continuing weakness in the UK's medium-term growth outlook”, the risk that the Government will fail to hit its targets for reducing the deficit and the UK's “high and rising debt burden”.
However, Moody’s predicted that on its current course, the UK will eventually regain its AAA status. Any relaxation in the deficit reduction could lead to another downgrade, it suggested.
Credit ratings assess a government’s ability to repay its loans, and can help determine the interest rate governments pay to borrow. Britain had been rated AAA, the highest possible rating, but is now rated Aa1, one notch lower.
Despite its role in financial markets, the loss of the AAA rating is likely to have more political than economic consequences.
Many economists question the credibility of the ratings agencies and say that the importance of a country’s rating to it borrowing costs is much less significant than in earlier decades.
The US and France have already lost their AAA ratings without seeing their borrowing costs rise
The Treasury’s independent Office for Budget Responsibility said last year that the loss of Britain’s AAA credit rating might not have much impact on the public finances.
Mr Osborne said he took some comfort in the Moody’s conclusion that the UK's basic creditworthiness remains “extremely high” because of the fundamental strengths of the economy.
The agency also suggested that Britain will, in time, regain its AAA status.
The Aa1 rating “reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK's debt trajectory,” the agency said.
It also suggested that slowing down the deficit reduction programme could lead to another downgrade.
“Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation,” it said.