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Ed Balls: "Our debts are getting bigger because there's no growth in the economy"
Labour has attacked the government's economic policy after the UK lost its AAA credit rating, but the coalition says it is "making progress".
Shadow chancellor Ed Balls said the downgrade was a "humiliating blow" for the chancellor, urging him to act fast to "kick-start our flatlining economy".
But chief secretary to the Treasury Danny Alexander said the government was getting Britain "back on track".
Ratings agency Moody's cut the UK's top rate to Aa1.
The agency, which is the first to downgrade the country's rating since 1978, said it had done so due to expectations that growth will "remain sluggish over the next few years".
It said the government's debt reduction programme faced significant "challenges".
Chancellor George Osborne said the decision was "a stark reminder of the debt problems facing our country" and did not mean the government should change course.
'Flatlining economy'Analysis
It was a question of not if, but when.
Financial markets knew a downgrade of the UK's sovereign rating was just a matter of time.
Even so, the announcement by Moody's was a big jolt to the ongoing economic debate.
There is no shame in losing the AAA rating at a time when most leading economies are struggling with the burden of rising debt and lack of growth.
The UK is following the experience of the US and France in 2011.
Their borrowing costs actually fell after the downgrades.
But the symbolism of Britain losing the gold-plated rating for the first time since the 1970s cant be ignored.
George Osborne will have to work hard to explain why, having set great store by retaining the AAA when he arrived at the Treasury, he has now seen it stripped away.
And it seems likely Moody's rival agencies will deliver their own verdicts soon.
However, speaking on BBC Radio 4's Today programme, Mr Balls said: "This credit rating downgrade is a humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the test of their economic and political credibility.
"I have always said... that you should not set your policy by the credit ratings agencies. They have got things wrong in the past.
"But what matters is the underlying economic reality and what has happened is the credit rating agencies have caught up with the facts.
"There has been no growth now for two years, our deficit is getting bigger... the plan has not worked. This is why the chancellor is fast running out of credibility."
Mr Balls added: "In the budget, the government must urgently take action to kick-start our flatlining economy and realise that we need growth to get the deficit down."
Pressed on whether he would increase borrowing at the moment, he said: "I would slow the pace of deficit reduction. I would have an immediate stimulus in the economy."
'Utter failure'Responding to the comments, Lib Dem minister Mr Alexander told BBC News that losing the AAA rating was not a devastating blow.
"I would say this is disappointing news and that the credit rating agencies are one benchmark amongst many in terms of the economy, but actually our credibility as a country is tested every day in the financial markets."
"We continue to command very low interest rates and also this country is continuing, despite all the difficulties and despite the fact that growth has been much slower than was originally forecast... to create jobs - a million jobs since we came into office."
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Mr Alexander insisted the government was trying to "deal with huge financial problems we inherited from Ed Balls and his colleagues and get the country back on track".
He added: "Or course it's been slower than expected, but I think we are making progress down the right road."
BBC political correspondent Alan Soady said the cut carried symbolism because, even in opposition, Mr Osborne had talked about the importance of reserving the UK's AAA rating, and protecting it was one justification for his deficit reduction plan.
The downgrade would therefore provide ammunition to the government's opponents, our correspondent said.
Scottish finance secretary John Swinney said the cut proved the UK's "vigorous austerity programme" was not working.
"The decision to downgrade the UK's credit rating confirms the utter failure of the UK government's economic strategy," he said.
In announcing the ratings cut, Moody's cited the "challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament".
It said the UK's huge debts were unlikely to reverse until 2016, but added its outlook was "stable" - meaning it sees no further downgrades in the near future - and its creditworthiness remained "extremely high".
The UK's net sovereign debt was the equivalent of 68% of the country's annual economic output, or GDP, at the end of last year.
The country has experienced a double-dip recession since 2008. It grew in the third quarter of last year - boosted by the impact of the Olympics, but shrunk again by 0.3% in the last three months of 2012.
CREDIT-RATING AGENCIES
- Private-sector firms that assign credit ratings for issuers of debt
- A credit rating takes into account the debt issuer's ability to pay back its loan
- That in turn affects the interest rate applied to the security (eg a bond) being issued
- A credit downgrade can make it more expensive for a government to borrow money
- AAA-rating is the best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.
In his Autumn Statement in December, Mr Osborne acknowledged public finances were taking longer to rectify than planned, and admitted he would be forced to extend austerity measures by at least another year.
And earlier this month, the Organisation for Economic Co-operation and Development said the Bank of England should be ready to inject more money into the economy to boost growth.
All three major credit agencies last year put the UK on "negative outlook", meaning they could downgrade its rating if performance deteriorates.
Germany and Canada are the only major economies to currently have a top AAA rating - as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.
The credibility of ratings agencies have also come under attack. S&P is being sued by the US government over ratings it gave to some mortgage-backed assets in the run-up to the global financial crisis in 2007, which subsequently fell dramatically in value.
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