On Aug. 1, Fitch Ratings jolted Wall Street and Washington by downgrading U.S. debt to AA+ from AAA.
This downgrade may even be an overly optimistic assessment of the U.S. fiscal outlook. It should be a wake-up call to the political class, but it won’t be.
The U.S. national debt is currently more than $32 trillion.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades,” Fitch said in explanation.
Fitch noted how much worse U.S. fiscal metrics are than peer countries. One example: the U.S. is on track to spend 10% of federal revenue on interest by 2025, compared with just 1% for the average ‘AAA’ rated country and 4.8% for ‘AA’ rated.
The U.S. fiscal and political outlook has deteriorated since the previous debt downgrade in 2011 when Standard & Poors dropped its AAA rating on U.S. debt while Fitch and Moody’s didn’t.
The ratio of U.S. debt to GDP at that time was only 65.5%, while the Congressional Budget Office expects it to be 98.2% this year. It’s projected to rise to 115% of GDP by 2033, adding more than $20 trillion to the national debt.
The U.S. ended the 1990s with four consecutive budget surpluses and a national debt of $5.7 trillion. In 2001, then-Federal Reserve Chair Alan Greenspan expressed concern about the consequences of paying off the debt. Radically different.
Budget experts expect the federal deficit for FY2023 ending Sept. 30 will be $2 trillion, doubling the FY2022 deficit. Under President Biden, deficits for three years will total $6 trillion.
What’s astounding is that this fiscal blowout is happening when the economy is growing, the COVID crisis is past and there are no domestic emergencies to address – and stoking 40-year high inflation.
Much more debt will be needed to finance the Biden spending binge that has only just begun for the hilariously misnamed “Inflation Reduction Act,” the Chips Act and the infrastructure bill.
Democrats are attacking Fitch, with Treasury Secretary Janet Yellen criticizing the downgrade as “arbitrary and based on outdated data.”
Outdated? Her own department just increased the government’s expected borrowing for July through September (three months) to $1 trillion from $733 billion.
Biden regularly untruthfully boasts he has “cut the debt in half,” or another version, “reduced the debt by $1.7 trillion” during his first two years as president. Both false.
Under President Trump, the U.S. ran a record-setting deficit of more than $3.1 trillion in FY2020 after Congress approved trillions of new spending on temporary COVID-19 programs on a bipartisan basis, including under the CARES Act in the early weeks of pandemic-induced lockdowns.
In four years, Trump presided over deficits totaling $7.8 trillion.
Biden and Trump reject changing mandatory “entitlements” – Social Security, Medicare, Medicaid, veterans benefits and interest on the debt – which account for 75 percent of all federal spending.
The Biden-Trump position may sound like a pledge to protect Social Security, but it isn’t. The law “without any change” requires a huge benefit cut in 10 years.
Ten years from now Social Security will run out of money. Benefit cuts of 23% will be triggered if no changes are made. Current law says all payments must come from within the program. Once the trust fund reserve is depleted, beneficiary payouts will be limited to whatever funds come in from Social Security payroll taxes.
Biden and his progressive allies want to create new entitlements costing trillions of dollars, while Trump attacks any Republican who even mentions reform.
There’s a reason Fitch’s credit downgrade happened during Biden’s presidency. It’s a no-confidence vote in U.S. political leaders – starting with profligate Biden.
E-mail Jim Hartman at email@example.com.