With the Tories’ economic credibility shot, confidence would wane, any hopes that corporate investment or consumer spending would carry the UK to recovery would evaporate.

Osborne has no choice. Half-baked measures on growth, such as pledges to crowbar £20bn of pension investment into infrastructure, simply won’t cut it any more.

He has to be brave, without sacrificing his deficit reduction plan.

But he does have some flexibility. Osborne set himself two golden rules on the public finances ­– to eliminate “the cyclically adjusted current deficit” and to have debt falling as a proportion of GDP by 2015.

The second rule has already been breached, but the first is intact. And it must remain so, as Moody’s has threatened another downgrade in the event of a “reduced political commitment to fiscal consolidation”.

The first rule, though, allows infrastructure investment because it qualifies as “capital” rather than “current” spending. Osborne should use the in-built flexibility to borrow more for vital projects that are still awaiting a private sector solution. Spending on infrastructure, after all, is estimated to deliver almost £3 of growth for every £1 spent.

He should then shuffle his cuts programme, taking more out of the bloated welfare bill, through means testing or not, extending public sector pay freezes, and halving the £11bn aid budget.

Tax cuts could then follow. Taking 2p off income tax would cost £10bn, and could be staggered over two years. Employers national insurance should also be cut by 1p, costing £4bn. Neither should be temporary.

The downgrade should in no way be mistaken for an endorsement of Labour’s haphazard economic strategy. But it is a damning indictment on Osborne’s failure to be bold on growth.

The time has now come. He can’t muddle along any longer.

Finance News – Business news from the UK and world