U.S. Debt Downgrade — More to Come?
Author: Greg Valliere
August 3, 2023
FIRST, THE U.S. FISCAL OUTLOOK is terrible, with the country’s total debt exceeding $31 trillion. Recent budget data have shown huge jumps in outlays and a likely deficit this fiscal year approaching $1.5 trillion. Borrowing has exploded to about $1 trillion in the third quarter, driving interest rates higher. In addition to the cost, there’s still the risk of policy dysfunction.
ANOTHER BUDGET CRISIS LOOMS as the fiscal year ends on Sept. 30. There’s no way Congress can finish work by then on spending for the new year, so there are two options — either a “Continuing Resolution,” kicking the budget fight to December, or a government shut-down prompted by fiscal hawks in the House who want to exceed the spending cuts that Congress agreed to in the debt ceiling deal earlier this summer. Democrats will not agree to re-visit that deal.
EITHER OUTCOME — A SHUT-DOWN OR KICK THE CAN — is exactly what exasperates Fitch, as Congressional ineptitude persists. As we wrote earlier this week, there’s no political willpower to address Social Security or Medicare, and still another huge fiscal crisis is coming by the middle of this decade as Congress debates whether to extend the Trump tax cuts.
THE PROSPECT OF VEERING FROM ONE BUDGET CRISIS TO ANOTHER will resume this fall, and if there’s no spending deal by December, the debt ceiling agreement stipulates that there will have to be a 1% spending cut in early 2024 — with loopholes for pet programs like defense and aid to Ukraine, which are becoming more controversial.
AND OF COURSE THERE COULD BE ANOTHER DEBT CEILING CRISIS in 2025: The current deal expires on Jan. 1, 2025 — although there will be Treasury gimmicks, like the ones used this spring, to keep the government funded well into 2025. There’s growing support for simply killing the debt ceiling, although getting that through this dysfunctional Congress is unlikely.
THE SECOND COMPLAINT FROM FITCH was a bit of a shocker. The ratings agency said the downgrade was partly a result of U.S. political instability; the Jan. 6, 2021 riot was cited. As we wrote yesterday, the potential for more political chaos is very real — if Trump wins re-election, he almost certainly would attempt to pardon himself for all transgressions, which would outrage half of the country.
THIS POLARIZATION WAS SUMMED UP by Richard Francis, a senior director at Fitch. “Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically.” More credit rating downgrades seem inevitable.
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