October 1, 2014

Debt Limit Showdown Could Harm U.S. Credit 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...

Three recent reports by credit ratings agencies (Moody’s Analytics, Fitch Ratings and Standard and Poor’s) have shown some improvement in the credit outlook for the United States, mostly due to the steadily improving economy and the declining deficit.

Moody’s and Standard and Poor’s upgraded their respective outlooks from “negative” to “stable.”

But as Robert L. Bixby, Executive Director of The Concord Coalition, points out in a new blog, “Concerns remain about the long-term outlook and the ability of elected leaders to raise the nation’s debt ceiling without provoking a crisis.”

Bixby writes that, “Despite their caveats, these reports might feed into an optimistic narrative that says the declining deficit and improving economy mean we can back away from efforts to rein-in the nation’s unsustainable structural budget deficit (i.e., a “grand bargain”).

This is a false, if politically tempting, narrative and one that is not supported by the credit ratings reports. The need for a comprehensive fiscal plan is not about cutting the deficit in the near-term while the economy is still weak, but about putting the budget on a sustainable long-term track.”

As noted by Standard and Poor’s, “We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation’s longer-term fiscal challenges could place renewed downward pressure on the rating.”

Fitch’s said that it will conduct a further review before the end of the year. It specifically noted that, “Avoidance of a ‘debt ceiling crisis’ and government shutdown would suggest that despite profound political differences, there is a common willingness to avoid disruptive and regular episodes of ‘crisis’ and would be supportive of a stabilization of the Outlook.”