George Osborne says Britain will not "run away" from its problems after Moody's downgraded the country's AAA credit rating, but Shadow Chancellor Ed Balls describes it as "a humiliating blow".

Please wait while this video loads. If it doesn't load after a few seconds you may need to have Adobe Flash installed.

The chancellor said the coalition was determined to stick by its plan for economic recovery after the rating was lowered by a notch to AA1.

The agency warned that "subdued" growth prospects and a "high and rising debt burden" were weighing on the economy.

But Mr Osborne said the loss of the gold-plated status did not mean the government should change course.

"We have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.

"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."

'Sluggish growth'

Labour has insisted that withdrawing demand from the economy has put it more at risk by stunting growth.

The statement from Moody's highlights the problems the weak medium-term economic outlook poses for deficit reduction plans.

It now expects the "period of sluggish growth" to "extend into the second half of the decade".

"The main driver underpinning Moody's decision to downgrade the UK's government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process," the agency said.

Ed Balls said: "This credit rating downgrade is a humiliating blow to a prime minister and chancellor who said keeping our AAA rating was the test of their economic and political credibility.

"It would be a big mistake to get carried away with what Moody's or any other credit rating agency says.

"Tonight's verdict does not change the fact that the credit rating agencies have made major misjudgements over recent years, not least in giving top ratings to US sub-prime mortgages before the global financial crash.

"But what matters is the economic reality that the credit rating agencies are responding to. Moody's themselves say the main driver of their decision is the weak growth in Britain's economy."