Pressure on the Chancellor to take more aggressive action to bolster the Government’s finances mounted yesterday after a leading ratings agency threatened to downgrade its view of the country’s creditworthiness while public borrowing set a record.

In an embarrassing blow to Alistair Darling that handed political ammunition to the Conservatives, Standard & Poor’s said that it was revising its outlook for Britain’s coveted “triple A” debt rating to “negative” from “stable”.

S&P left the triple A credit rating, a gold-plated standard that is the highest available, intact for now. But its warning shot, the first such move for three decades, stoked nervousness over the Government’s drastic plunge into the red as a result of the recession and banking crisis.

Shares plummeted as anxiety over Britain’s public debt mountain rippled through markets. The FTSE 100 index fell almost 3 per cent, closing down 122.9 points at 4,345.5. The pound fell heavily in morning trade but recovered some poise to close up on the day. In the gilts market, government bonds also sustained a battering, driving yields on the benchmark 10-year gilt up by as much as 0.09 per cent.

Worries over the rapid worsening of the public finances multiplied as official data showed that the Treasury borrowed £8.5 billion last month. This was a record for any April, and more than four times the £1.8 billion figure for the same month last year.

In last month’s Budget, the Chancellor unveiled a leap in planned borrowing to £178 billion for 2009-10, equal to to 12.4 per cent of GDP. Borrowing is being driven to postwar records as the recession undermines tax revenues and surging unemployment sends benefit payments soaring. The government’s books are also taking a heavy hit from the multi-billion cost of bank bailouts, although the ultimate cost remains highly uncertain.

S&P fuelled fears over the situation as it warned that it would downgrade Britain’s rating if it “concluded that the next Government’s fiscal consolidation plans are unlikely to put the debt burden on a secure downward trajectory over the medium term”.

Any such downgrade would be a heavy blow to Britain’s financial standing. It would force the Treasury to pay higher interest bills on future borrowing to compensate those who buy its bonds for running greater risks.

However, calculations by Colin Ellis, of Daiwa Securities, suggest that, in a hypothetical example, the extra interest cost on this year’s planned £220 billion in newly issued gilts would amount to less than £600 million had such a downgrade already occured.

Despite that modest cost, even the threat of a downgrade after the next election will inflame concern that the Government will face higher interest bills to finance the burgeoning deficit.

S&P’s decision ratcheted up pressure for the Chancellor, and the next Government, to rein in runaway borrowing through further, draconian spending curbs and big tax increases.

The agency said that its move was motivated by concern that public debt could reach 100 per cent of GDP, from 55 per cent now, and remain stuck there. “A government debt burden of that level, if sustained, would in S&P’s view be incompatible with a AAA rating,” it warned.

S&P said that it had amended its assessment of UK public finances to take a more cautious view of how quickly revenues could revive, and how quickly ministers could curb spending. It also said that the eventual bill for the banking bailout will be between £100 billion and £145 billion, against a £50 billion Treasury figure.

S&P said that it still believed that Britain’s creditworthiness would stay supported by its “wealthy, diversified economy, a high degree of fiscal and monetary policy flexibility; and its relatively flexible product and labour markets”. However, it said that it was worried over the political will of a future Government to curb spending.

It said that it would reaffirm the triple A rating, with a stable outlook, only if “comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate”.

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