November 23, 2014

Worried by Federal Debt, Fitch Lowers U.S. Outlook

  • The national debt has grown significantly in recent years due to rising annual deficits. A deficit occurs in any year the government spends more...

Fitch Ratings on Monday affirmed the U.S. government’s AAA rating but lowered its long-term rating outlook from “stable” to “negative” and warned that there is “a slightly greater than 50 percent chance of a downgrade over a two-year horizon.” 

The U.S. economy remains one of the most productive in the world, Fitch noted, while the dollar is still “the pre-eminent global reserve currency.” This enables Washington to borrow at low interest rates, at least for now.
 
But Fitch projects that federal debt held by the public could exceed 90 percent of the Gross Domestic Product  by the end of the decade – with interest consuming more than 20 percent of the government’s tax revenue. That level of debt, Fitch warned, would limit the government’s “ability to respond to future economic and financial crises.”
 
The recent failure of the congressional super committee on deficit reduction, Fitch said, “underlines the challenge of securing broad-based consensus on how to reduce the out-sized federal budget deficit.”
 
Fitch echoed warnings from The Concord Coalition and many other budget analysts that further deficit reduction efforts would not be credible if they relied solely on promised cuts in discretionary spending and failed to include tax and entitlement reforms.
 
Another big credit rating agency, Standard & Poor’s, lowered the U.S. one step below AAA in August. That controversial move came shortly after political disputes threatened to cause the government to default on its financial obligations.