Ratings agency Fitch has stripped the UK of its AAA rating due to its "weaker economic and fiscal outlook". The agency placed the UK on an AA+ rating, following Moody's downgrade of UK debt in February.
Howard Archer: 'The downgrade is no surprise'
Fitch said: "The downgrade of the UK's sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch's medium-term projections for UK budget deficits and government debt."
The downgrade will place further pressure on the Government ahead of next week's first quarter GDP figures, which will reveal if Britain has managed to avoid an unprecedented triple-dip recession. The agency now expects Government debt to peak at 101% of GDP in 2015-16, only declining gradually in 2017-18. That is worse than its previous forecast of debt peaking at 97% of GDP and declining in 2016-17.
Fitch, which waited until stock markets had closed before announcing the downgrade, had already warned that Government failure to stabilise debt below 100% of GDP and set it on a firm downward path would trigger a downgrade.
It added: "Despite the UK's strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with an AAA rating."
Fitch slashed the UK's growth forecast to 0.8% this year, from its earlier expectation of 1.5%. Next year it expects the UK economy to grow by 1.8%, down from its previous 2% forecast. Earlier this week the International Monetary Fund also cut the UK's growth forecast growth from 1% to 0.7% this year and 2014's projection from 1.9% to 1.5%, noting the recovery was "progressing slowly". Economists largely expect the UK to eke out growth in the first three months of the year, after contracting by 0.3% in the final quarter of 2013. First quarter GDP figures are released on Thursday by the Office for National Statistics.
The downgrade will be another blow for Chancellor George Osborne
Fitch blamed the UK's slow recovery and high deficit on private and public sector "deleveraging" and the ongoing drag from the eurozone crisis. IHS Global Insight economist Howard Archer said the downgrade was "no surprise" and is likely to have minimal market impact. But he added: "Nevertheless, Fitch's move is another slap in the face for the Government - particularly as the Chancellor (George Osborne) made keeping the AAA rating a key focus for the UK."
Fellow ratings agency Standard & Poors held the UK's debt rating steady at AAA earlier this month, but warned over the economy's "negative outlook". Fitch warned the slower pace of deficit reduction means the next government will have to make "substantial spending reductions and/or tax increases" if public debt is to be cut. But it said despite the downgrade the UK retains an "extremely strong" credit profile and a stable outlook.
A Treasury spokesman said: "This is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade. "Though it is taking time, we are fixing this country's economic problems.
Balls: 'This downgraded Chancellor needs to wake up'
"The deficit is down by a third, a million and a quarter new private sector jobs have been created and the credibility we have earned means households and businesses are benefiting from near record-low interest rates."
Shadow chancellor Ed Balls said it was "another humiliating blow" for the Prime Minister and Chancellor and called for a "plan B" on jobs and growth.
He said: "This downgraded Chancellor needs to wake up and realise that his failing economic policies are causing long-term damage and Britain's families and businesses are paying the price.
"When even your biggest allies - the IMF and the credit rating agencies - abandon you it really is time to put political pride aside and finally act to kickstart the economy."
Ratings helps holders of sovereign debt assess the risk of default. Weaker ratings potentially mean the Government will face higher borrowing costs on the international money markets, adding to the pressure on the public finances. However, economists said Fitch's downgrade will already have been priced in by markets.
Dr Archer said: "There are so few countries left now with a AAA rating that to lose it is not the stigma or major threat to market confidence that it would have been a couple of years ago."