Fitch Ratings, one of three major credit-rating agencies, downgraded the U.S. debt from AAA to AA+. In doing so, it joins S&P, which downgraded the U.S. back in 2011.
Here is how Fitch explained its decision:
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 that has manifested in repeated debt limit standoffs and last minute resolutions.
High and growing debt is correct. According to CBO’s most recent long-term budget outlook, the federal government will add $119 trillion in additional deficits over the next 30 years to reach 181 percent of GDP. In 2053, spending will consume 29.1 percent of GDP up from 24.2 percent in 2023. Revenue as a share of GDP is projected to increase slightly from 18.4 to 19.1 percent.
We are entering uncharted territory under fairly rosy assumptions: relative prosperity (though growth rates are slowing down as a result of debt accumulation), relatively low interest rates, and moderate inflation. In other words, expect things to look worse than this.
The most interesting part of the explanation is the part about “erosion of governance.” Here is how the section reads:
In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.
Basically, this says it all. Tax cuts without offsets, spending paid for with debt, refusal to reform the drivers of our debt, no plan to pay back our growing debt, and so on and so forth. In addition, debt-ceiling standoffs are both a consequence and cause of this erosion of governance. And this “steady deterioration in standards of governance” has been going on “over the last 20 years.”
Fitch’s writing on this reflects the fact that the erosion of governance is a bipartisan problem. Yet, politics means that someone is going to make this downgrade a partisan issue as Noah wrote earlier. Here is Senate Majority Leader Chuck Schumer’s tweet on this:
The downgrade by Fitch shows that House Republicans’ reckless brinksmanship and flirting with default has negative consequences for the country.
You would think that Democrats would use this downgrade as a wake-up call and may be compelled to reach across the political aisle to work on a solution. Nope. Instead, this downgrade provides another opportunity for political attacks. By doing so, Schumer and friends demonstrate that partisanship is more important than our fiscal challenges, in turn providing a good example of why we got downgraded.
My prediction: Expect more erosion of governance.