Moody’s downgrade reminds us of US fiscal challenges.
Moody’s Warning Highlights Perilous Fiscal Situation in the United States
Moody’s decision to cut its ratings outlook for the United States to negative is yet another warning of the country’s perilous fiscal footing, even if not an immediate threat to the economy.
Moody’s Investor Services is the last ratings agency to give the U.S. its top rating: AAA. Both Fitch Ratings and S&P Global Ratings have already dropped the U.S. below their top threshold, and while Moody’s held off doing so, the negative outlook raises the odds that it could end up following suit.
Concerns Mount Over Fiscal Challenges
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said the most recent outlook downgrade isn’t surprising given the soaring federal debt and trouble dealing with budget deficits.
“Anybody who is paying attention will know that we are on a fiscally unsustainable path and that our lawmakers are doing an abysmal job of addressing it,” she told the Washington Examiner. “It makes sense, whether it’s a downgrade or a lower watch — this reflects where we are as we govern from crisis to crisis.”
MacGuineas said the outlook downgrade isn’t likely to have a major effect on interest rates, given how many other factors are at play. She said, though, that the move “is more of a reminder … that the interest rate situation is going to get worse and lead to higher interest payments if we don’t do something about the underlying fiscal challenges.”
The country is dealing with nearly $33 trillion in national debt, a number that is only set to increase in the coming years and decades. Additionally, the federal budget deficit ticked up to $1.7 trillion for fiscal 2023, which ended in September, the Treasury Department announced.
Adding to concerns about the country’s fiscal standing is that automatic cuts to Social Security are estimated to come in 2035 unless something is done to shore up its trust fund, and the Medicare Hospital Trust Fund is expected to be exhausted between 2028 and 2031.
Political Paralysis and Rising Debts
In announcing the downgrade, Moody’s cited the current hole the U.S. finds itself in. It also noted that despite the looming deadlines and rising debts, Congress has been seemingly paralyzed by partisan bickering and disagreement on a course of action, particularly as higher interest rates make the situation all the more precarious.
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’ fiscal deficits will remain very large, significantly weakening debt affordability,” Moody’s said in a statement. “Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
Mark Hamrick, Bankrate’s senior economic analyst, told the Washington Examiner that the Moody’s outlook downgrade is an “acknowledgement and a recognition” of how the divided Congress and tense political situation makes meaningful work on the country’s fiscal problems so difficult.
“It shouldn’t surprise anybody that this has happened, and it’s not really consequential in and of itself for the markets, but it is sort of writing a warning ticket to the elected officials, and ultimately by extension, to the American public” that there are consequences for the inability to manage fiscal issues in a way consistent with regular order, he said.
Efforts to Address the Fiscal Crisis
But lawmakers have taken tentative steps in recent days to improve the country’s fiscal situation. New House Speaker Mike Johnson (R-LA) used his first floor speech as leader of the House to urge the adoption of a bipartisan fiscal commission tasked with making a plan to fix the country’s debt.
And then last week, Sen. Mitt Romney (R-UT) and Sen. Joe Manchin (D-WV), alongside a cast of other Republicans and Democrats, proposed legislation that would create such a bipartisan and bicameral commission.
The commission would work to produce a report and propose legislation that would stabilize the ratio of public debt to gross domestic product within a 15-year time frame and improve solvency of federal trust funds, such as those for Social Security and Medicare, over a 75-year time frame.
“I think that is the best idea out there. … It is important because it provides political cover at a time where there is not a lot of political courage,” MacGuineas said.
“I think it makes a ton of sense; it’s not guaranteed to succeed, but it’s probably the best chance there is right now, especially if an emergency comes along. It would be good to know that people are working on this,” she added.
The downgraded outlook was more bad news for President Joe Biden, who has consistently gotten low approval ratings on his handling of the economy despite a major push from the White House to emphasize the bright spots in the economy as “Bidenomics” at work. The Treasury Department said after the downgrade that it didn’t agree with the move.
“While the statement by Moody’s maintains the United States’ Aaa rating, we disagree with the shift to a negative outlook. The American economy remains strong, and Treasury securities are the world’s preeminent safe and liquid asset,” said Deputy Treasury Secretary Wally Adeyemo in a statement.
Rep. Jodey Arrington (R-TX), the Budget Committee chairman, said in Monday statement after the outlook downgrade that the U.S. is “barreling towards a debt-related economic crisis.”
There have been other warning signs this year as well. In August, Fitch announced that America’s AAA rating would be downgraded to AA+ following this year’s debt limit fight.
While Moody’s reaffirmed its AAA rating for the U.S. in announcing the outlook downgrade, Hamrick said that righting the fiscal ship becomes even more fractious during an election year.
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What is the significance of the proposed legislation in addressing the fiscal crisis in programs such as Social Security and Medicare?
In programs such as Social Security and Medicare. The proposed legislation has garnered support from both sides of the aisle, signaling a potential willingness to address the fiscal crisis.
However, the path forward is still uncertain. The current political climate, characterized by partisan bickering and polarization, poses a significant obstacle to effective fiscal policy measures. Without a consensus on a fiscal plan, the decline in debt affordability is likely to continue, putting the country at even greater risk.
The Moody’s outlook downgrade serves as a wake-up call to both elected officials and the American public. It highlights the consequences of political paralysis and warns of the worsening interest rate situation and its impact on higher interest payments. The need to address the underlying fiscal challenges becomes more urgent with each passing day.
Addressing the fiscal crisis requires proactive and decisive action. Lawmakers must come together to find common ground and develop a comprehensive plan to reduce government spending and increase revenues. Furthermore, a bipartisan and bicameral commission, as proposed by Sen. Romney and Sen. Manchin, could provide a structured approach to tackling the issue.
With nearly $33 trillion in national debt and mounting budget deficits, the United States is standing on precarious fiscal footing. The long-term viability of programs like Social Security and Medicare is also in question unless steps are taken to secure their trust funds. Failure to address these challenges will lead to dire consequences for the economy and future generations.
Ultimately, the Moody’s warning serves as a stark reminder that the United States cannot afford to ignore its perilous fiscal situation. It is a call to action for lawmakers to put aside partisan differences and prioritize the long-term financial health of the country. The time for decisive action is now, before the fiscal crisis becomes an irreversible catastrophe.
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