Credit ratings agency Moody's Investors Service downgraded Britain's government bond rating one notch from the top AAA to AA1 Friday, and said that sluggish growth and rising debt were weakening the country's medium-term outlook.
British treasury chief George Osborne said the blow only redoubled his resolve "to deliver our economic recovery plan," based on deep spending cuts.
Moody's said "subdued" growth prospects and a "high and rising debt burden" were weighing on the British economy.
The agency said rising debt meant "a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016."
It said, though, that "the U.K.'s creditworthiness remains extremely high," and its outlook was stable.
Moody's said 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 U.K.'s debt trajectory."
Move unwelcome but not unexpected
For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies — Moody's, Standard & Poor's and Fitch — had placed Britain's rating on negative watch, as the economy continues to struggle.
The Conservative-led government is cutting 50 billion pounds ($80 billion) in spending through 2015 in a bid to slash the national debt, which stands at more than 1 trillion pounds, over 70 per cent of GDP.
Moody's said it expected that level to peak at just over 96 per cent of GDP in 2016.
Public sector borrowing remains stubbornly high, and is forecast by the government's Office for Budget Responsibility to be 120 billion pounds for 2013.
Critics say the government's austerity policy has failed to kick-start the economy, which has been through two periods of recession since 2008.
The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 per cent. But the economy contracted by a worse-than-expected 0.3 per cent in the last three months of 2012.
Glimmers of good news for the government include a stable unemployment rate — 7.8 per cent in the last quarter — and low interest rates.
The yield on the 10-year Treasury bond fell over the year from 2.29 per cent in February of 2012 to 2.11 per cent now.
Osborne said in a statement that the downgrade was "a stark reminder of the debt problems facing our country," with a debt accumulated over the years exacerbated by Europe's economic crisis.
"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said, promising to press on with debt-cutting.
"We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs," Osborne said.