Source: The Associated Press

Britain’s government on Tuesday kicked off a public review of planned spending cuts as a leading ratings agency warned that the country faces a “formidable” fiscal challenge and must cut its huge budget deficit faster to keep its top credit rating.

Treasury chief George Osborne told lawmakers that he was determined to accelerate cuts to the deficit to mute any doubts about Britain’s creditworthiness.

“With people around the world looking at sovereign credit risks, the budget will quicken the reduction of the U.K.’s structural deficit before those eyes turn on Britain,” he said.

Britain’s budget deficit is forecast to reach 10.4% of gross domestic product this year, while debt as a percentage of GDP was 62% in the 2009/10 fiscal year.

Osborne launched the review of the government’s spending for the next three years just hours after Fitch Ratings agency released a special report that flagged up the dangers facing Britain.

Fitch noted that the rise in public debt ratios in Britain since 2008 is faster than any other AAA-rated country, adding that the primary deficit is almost twice as large as during previous economic downturns in the 1970s and early 1990s.

“The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium term consolidation strategy,” the report said.

Prime Minister David Cameron’s coalition government had made tackling the deficit its priority. Cameron talked tough on Monday, warning that the finances were worse than he had anticipated, noting that annual interest payments alone would rise to around 70 billion pounds a year, from 42 billion pounds currently, within five years if action is not taken.

Fitch applauded Cameron for acting “very quickly” on fiscal consolidation after he announced 6 billion pounds of spending cuts, equating to around 0.4% of GDP, immediately after taking office in May.

But it stressed that the coalition government’s emergency budget on June 22 must set out a more aggressive program than the targets set out in the previous government’s April budget to reduce the deficit to 8.5% of GDP in 2011/12 and to 5.2% in 2013/2014.

The report pointed to austerity measures adopted in other European countries and increasing concerns about sovereign risk in developed countries.

“Both the size of the deficit currently projected for 2011 and the failure to reduce the deficit to 3% of GDP within five years are striking,” Fitch said in its report.

“A more ambitious deficit-reduction path — with borrowing 1% lower than in budget 2010 through the medium term — would result in an earlier peak in the debt/GDP ratio and a clearly declining debt path within the medium-term horizon, helping to go some way to restoring fiscal space, or a cushion against further shocks,” it added.

The spending review announced Tuesday will set spending limits for every government department from 2010/11 to 2014/15. The review, to be completed in autumn, includes consultation with the private sector and general public.

Former Prime Minister Gordon Brown had repeatedly warned that bigger spending cuts this year could jeopardize Britain’s fledgling recovery from its worst recession since the Second World War.