Fitch Ratings issued a “Negative Outlook” on the United States’ creditworthiness.
The firm — which is one of the “Big Three” credit rating agencies in the United States alongside Moody’s and Standard & Poor’s — maintains the country’s “AAA” rating, but points to the rising national debt as an area of concern.
According to Fitch, a “AAA” rating denotes “the lowest expectation of default risk” granted “only in cases of exceptionally strong capacity for payment of financial commitments.” A downgrade would cast doubt on the United States federal government’s ability to meet debt obligations.
As Fitch’s Tuesday report details:
The Negative Outlook on the rating reflects ongoing risks to the public finances and debt trajectory, notwithstanding the improvement in Fitch’s fiscal and debt projections since its last review. Debt dynamics currently point to a broad stabilization in the debt ratio at a level where a further meaningful increase could lead to a downgrade. However, key variables including real interest rates and fiscal deficits may not follow the expected path, potentially creating downside risk.
The report also implicates controversy over the 2020 election and the proposal of new voter identification laws:
Governance is a weakness relative to the ‘AAA’ median, and the future direction of the rating is sensitive to the direction it takes. The failure of the former president to concede the election and the events surrounding the certification of the results of the presidential election in Congress in January, have no recent parallels in other very highly rated sovereigns. The redrafting of election laws in some states could weaken the political system, increasing divergence between votes cast and party representation. These developments underline an ongoing risk of lack of bipartisanship and difficulty in formulating policy and passing laws in Congress.
Despite a stronger-than-expected economic recovery following COVID-19 and the lockdown-induced recession, Fitch notes that massive government deficits driven by relief packages are a leading cause of fiscal instability.
Indeed, large budget deficits over the past two years were driven by government stimulus bills — including President Trump’s $2.3 trillion CARES Act and President Biden’s $1.9 trillion American Rescue Plan. Currently, the federal deficit is positioned to equal 14% of economic output in 2021.
Congressional Democrats are seeking to pass a $3.5 trillion spending bill via budget reconciliation — a strategy that overcomes challenges posed by an evenly split Senate.
As Politico reported:
The proposal sets an overall limit of $3.5 trillion for the spate of Democratic policy ambitions that won’t make it into a bipartisan infrastructure deal, if Congress can reach one. If the still-forthcoming budget resolution can clear both chambers with lockstep party support, it will unleash the power to circumvent a GOP filibuster using the so-called reconciliation process, the same move that Democrats used to pass the president’s $1.9 trillion pandemic aid package in March.
The $1 trillion bipartisan infrastructure deal is intended as a compromise on President Biden’s $2.7 trillion American Jobs Plan.
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Source: Dailywire
