Chancellor to press ahead with austerity programme despite credit rating agency's negative outlook for UK
George Osborne was forceful in his response to the threatened downgrade by Moody's and the potential loss of the UK's AAA status.
The chancellor said he would press ahead with his programme of austerity cuts because to relax controls on public spending would be to risk an immediate downgrade.
He is under pressure to counter challenges to his strategy for the economy after six months of lower growth targets that have reduced his room for manoeuvre ahead of a budget on 21 March.
In a testing time for the coalition, Osborne has already committed himself in several statements to continuing with his austerity programme.
Tory backbenchers on the right of the party are committed to backing Osborne in the weeks ahead despite knowing that there is a growing backlash against welfare benefit cuts that make up the bulk of his austerity plans over the next two years.
The leading thinktank the Institute for Fiscal Studies said earlier this month that more than 80% of the measures to come were cuts in public spending, many of them from welfare budgets.
Tax credits, housing benefit and a £1,000 a year cut in child benefit from higher earners are chief among them.
The prime minister is keenly aware that he is about to enter several fights while the battle over the NHS still rages.
Osborne is expected to come under intense pressure from the Labour frontbench to take his foot off the pedal and switch some of his efforts into boosting the economy.
Labour has suggested a cut in VAT or employers' national insurance to boost jobs and consumer confidence after a strong rise in unemployment in recent months.
A report by the Chartered Institute for Personnel and Development on Monday warned that the number of people out of work could rise to almost 3 million without a change of policy by then treasury.
It said the continued fallout from job cuts in the public sector was hitting the economy. Hopes that the private sector would employ many of those put out work have so far proved unfounded. The CIPD found that the opposite was the case, and private sector employers planned to continue reducing their workforces through 2012.
The chancellor is also unlikely to enjoy his next meeting with his French counterpart François Baroin, who expressed deep frustration last month when his country was downgraded by Standard & Poor's.
With the head of the French central bank, Baroin criticised the ratings agencies for ignoring Britain's poor economic health and outstanding debts.
The UK has lower government debts than France and Germany, but a much higher total when household and corporate debts are included. In particular, UK banks also have big debts after a lending spree to companies and countries that may not pay back even a fraction of their borrowings.
Moody's said it was concerned by "materially weaker growth prospects" over the next few years, with risks skewed to the downside.
It argued that any further deterioration in the economic outlook would push the economy off course and force a downgrade.
"Although the UK is outside the euro area, the high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure on the UK's AAA rating given the country's trade and financial links with the euro area. Overall, Moody's believes that the considerable uncertainty over the prospects for institutional reform in the euro area and the region's weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe."
Osborne will attend meetings next week that could decide the fate of the eurozone, though he will not be directly involved in the decisions over whether to withhold loans from Greece.
The economy has flatlined since the autumn of 2010, according to figures from the Office of National Statistics. Forecasts last year that the economy would begin to recover proved optimistic and economists have downgraded their forecasts for 2012 following warnings that growth has begun to contract. In the last three months of 2012 the economy shrank by 0.5%, the ONS said.
The Bank of England and the independent Office for Budget Responsibility have downgraded their forecasts for this year, though the business lobby group, the CBI, said it believed the economy would continue to expand following positive comments from its members.
Osborne has blamed the euro crisis for the poor performance of the economy while opposition MPs have accused him of killing household and business confidence with his spending cuts and warnings that Britain could face the same prospect as Greece.