Blow for the chancellor George Osborne as Fitch reacts to increased borrowing forecasts in the budget
Ed Miliband will warn that Britain is sliding towards a lost decade without economic growth after the ratings agency Fitch responded on Friday night to the increased borrowing forecasts in the budget by putting the UK economy on negative watch, the first step to another credit rating downgrade.
Fitch said Britain's lack of growth and growing debt mountain meant there was a "heightened probability of a downgrade in the near term".
It said its possible decision – which would make it the second of the three major agencies, after Moody's, to downgrade the UK – reflected "the latest economic and fiscal forecasts published by the Office for Budget Responsibility [OBR] that indicate that UK government debt will peak later and at a higher level than previously expected".
The government will find out in April whether the economy has suffered an unprecedented triple-dip recession. In the last three months of 2012 it shrank 0.3%. A second quarter of negative growth could undermine faltering business confidence and choke off the first signs of a recovery.
Several analysts said that even without a triple dip, the worsening economic situation has made further credit downgrades inevitable.
In documents that accompanied the budget, the OBR said it halved the forecast for growth this year to 0.6% and said the debt-to-GDP ratio would peak at 85%.
But Fitch said a tougher measure of the UK's debt burden showed the debt pile would exceed 100% of annual national income before it begins to fall, which makes UK's situation more perilous. While it credited the UK with having a "high-income, diversified and flexible economy", it said the last four years of low growth had damaged the economy.
Fitch said: "The persistently weak performance of UK growth, in part due to European growth, has increased uncertainty around the UK's potential output and longer-term trend rate of growth with significant implications for public finances."
Last month Moody's stunned George Osborne when it became the first agency to kick Britain out of the exclusive AAA club, which still includes Germany, Canada and Switzerland.
In a speech to the Labour party's policy forum on Saturday Miliband will accuse the government of leading Britain into a lost decade. "They are shrugging their shoulders, They have run out of ideas. They are resigned to a lost decade," he will say. But he will also admit that Labour faces a struggle in persuading fatalistic voters that British economic paralysis is not inevitable. He will say: "I know some of you are thinking: 'It's true things look grim. But there's nothing we can do.'
"Many people will believe that the failure of this government means they should give up on politics altogether, that nobody can turn round the problems of this country and nobody deserves our vote."
The Labour leader will say it is his task to show that he can stop the slide and that a "lost decade" is not inevitable.
Polling suggests that although voters are disillusioned with the government's economic record they are doubtful that any government can lift the economy faced by European economic recession.
Frustration with Labour's economic strategy was revealed by Lord Mandelson, the former business secretary, who claimed the public were tired of the Labour argument about cutting too far, too fast.
Speaking at a CBI dinner, he said: "The whole argument about whether we are cutting too far, too fast is about the past. It is rather predictable party political stuff for over the dispatch box. It is a bit tiring to the public.
"I would put the emphasis less on whether we are going too far, too fast, not fast enough, on deficit reduction, and move the debate on to the future of the economy.
"Everyone knows we are in a heck of a bad way in the economy. Quite a lot more pain is going to be experienced. What we should be saying is: this is the light at the end of the tunnel. This is where we should be heading. We should develop a slightly less defensive and more forthright analysis or understanding of the structural problems in our economy and why they weren't completely eradicated by the Labour government. I would be a little more candid about the past".
"We need to explain how we would retool and redevelop our economy. We need a politician who will fight on that rather than fight about the past or fight over what is fair and what is not fair. The Labour party has got to offer more than that.
"If the Labour party is going to go into the next election fighting it on social justice rather than economic transformation and prosperity it will be limited in its appeal. We need to tell people in the country how we are going to earn our way and make our living in the country rather than how we are going to redistribute our money from the very rich. Sometimes they make the mistake of talking about that too much."
Chris Leslie, Labour's shadow Treasury minister, said: "This is yet another blow to a downgraded chancellor who made keeping the confidence of the credit rating agencies the number one test of his economic policy. What really matters are the economic realities which Fitch are responding to including, as their statement says, 'the persistently weak performance of UK growth'."
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