The Chancellor, George Osborne, is under increasing pressure to change the course of the government’s economic policy after official data yesterday showed that the UK economy contracted by 0.7 per cent, deepening the double-dip recession.
Bond investors warned that the UK is likely to lose its triple-A credit rating. This has helped keep the cost of borrowing for banks, businesses and households down and Mr Osborne has often presented it as an achievement during his time as Chancellor.
Moody’s credit rating agency put the UK on negative watch in February which means there is a 50:50 chance of a negative downgrade. The UK has held its triple-A credit rating since 1978.
However, if the UK did lose its triple-A rating, borrowing costs may not be hit as hard as feared because the UK is still considered a safe haven compared too much of the rest of Europe and the Bank of England’s quantitative easing (QE) programme that has involved buying up billions of pounds worth of government bonds.
However, the austerity measures and attempts to cut the deficit have not been matched by economic growth and last week the International Monetary Fund (IMF) said that the UK may need to change course if there is no growth by early 2013.
Vince Cable, the Business Secretary, echoed the IMF sentiments, saying: "Budget discipline is a necessary but not a sufficient condition for recovery and for rebalancing the economy. We also need policies to stimulate long-term growth."
Mr Osborne has had a torrid three months since he presented his budget which resulted in several spectacular u-turns. This has led to question marks over Mr Osborne’s competency as Chancellor.
Earlier this week, Nigel Lawson, who held the same position in the 1980’s in Mrs Thatcher’s Conservative government, warned Mr Osborne that he should relinquish his position as part of a Conservative strategy team.
Mr Lawson said: “I do think it might be sensible to give up the formal role and focus exclusively on his job as Chancellor of the Exchequer which is a tremendously important job."
The Prime Minister, David Cameron, said that the government would do more to help the economy.
He said: "We've got to do more. We're going to roll up our sleeves and do everything possible to get business going in Britain, to get housing going, to get jobs going."
However, David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, said: "This is the nail in the coffin of the Chancellor's credibility. The part-time Chancellor and his advisers should be put out to pasture. This is the most inept Chancellor for 50 years."
Ed Balls, the shadow Chancellor, said: "If these figures don't make the Chancellor wake up and change course, then I don't know what will. We need a Plan B now to get the economy moving again and radical reforms to set Britain on a new course for jobs, growth and long-term prosperity."
Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.