S&P’s verdict came at the end of a day that had seen Osborne tell MPs he is open to the possibility of the Bank of England scrapping its two per cent inflation target in favour of a growth-based remit.
With the economy remaining sluggish and Osborne struggling to break down the government’s mammoth annual deficit, S&P’s new lowered outlook means that it considers there to be a one in three chance that the UK’s prized triple-A rating could be slashed in the coming year.
Fellow credit rating agencies Fitch and Moody’s put the government on negative outlook earlier in 2012.
Speaking to the Treasury Select Committee of MPs in Westminster yesterday, Osborne said that credit ratings were just “one test alongside others” of the state of the government finances.
“The ultimate test is what [rate] you can borrow money at,” he told the committee. “The test we have is one we have to meet every week when we go and try and sell our gilts.”
The UK’s gold-plated rating has previously been cited as evidence of the coalition’s deficit-reduction plans gaining the confidence of analysts.
Shadow chancellor Ed Balls used the lowered outlook to hit out at the chancellor’s policies.
“Standard & Poor’s is clear that it is weak economic growth which has led to their estimates for the deficit and debt being revised up,” Balls said.
“In fact the chancellor is now set to borrow £212bn more than he planned two years ago because of his failure on jobs and growth.”
Yet S&P seemed to urge the coalition to avoid a more profligate stance. “The outlook revision reflects our view that we could lower the ratings on the UK within the next two years if fiscal performance weakens beyond our current expectations,” S&P said.
“We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation,” it added.
Weak economic growth has prompted wide debate on “innovative” forms of monetary stimulus, Osborne told MPs yesterday.
Osborne said he was “glad” that his incoming Bank of England governor was part of such global discussions.
Earlier in the week, Mark Carney – who will take over as governor next summer – said that adopting a nominal GDP target, which would take both inflation and growth into account, “could in many respects be more powerful than employing thresholds under flexible inflation targeting”.
Osborne added yesterday: “There are a lot of innovative things happening around the world,” referring to the US Federal Reserve’s new targets for unemployment.
Yet Osborne also told the committee the Bank’s inflation target has “served us well”, and that a new system would need to provide “very significant rewards” in order to be adopted.
Carney will appear in front of the committee on 7 February 2013.