Opinion Express View on Fitch’s US rating: The downgrade

On Tuesday, credit rating agency Fitch downgraded the US sovereign rating from AAA to AA+. The rating agency’s rationale for the decision is three-pronged — a worsening in the fiscal metrics over the coming three years, a high and rising government debt burden and a deterioration in governance that shows in the recurring standoffs on the debt-limit between the two political parties. The ratings decision has elicited strong criticism, and for good reasons. The US economy is faring better than expected. Few have any doubts over the country’s ability to honour its obligations. And in June, the debt ceiling crisis was averted after a deal was reached between US President Joe Biden and Republican House Speaker Kevin McCarthy. While the ratings downgrade has not caused significant dislocation in the financial markets so far, it may lead to some reputational damage. But regardless, Fitch does raise concerns over the state of US government finances.

The rating agency expects the general government deficit to rise from 3.7 per cent of GDP in 2022 to 6.3 per cent in 2023. This rise can be traced to weaker revenues, higher interest obligations and greater spending. Both state and local governments are also expected to run deficits this year, after running a surplus last year. Moreover, Fitch does not consider the possibility of significant fiscal consolidation in the immediate term considering the presidential elections are due in November 2024 — it has pegged the deficit to rise to 6.6 per cent of GDP in 2024 and further to 6.9 per cent in 2025. The rating agency also expects the debt to GDP ratio, currently well above the pre-pandemic level, to rise in the coming years. The rise in borrowing costs — congressional budget office estimates interest costs will double to 3.6 per cent of GDP by 2033 — will pose additional challenges.

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Even as members of the US administration have dismissed the ratings downgrade as “arbitrary and based on outdated data”, both political parties must awaken to the ramifications of bickering over crucial policy matters. As the rating agency has said “repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management”. And Fitch is not alone. In 2011, Standard & Poor’s downgraded the US, citing “difficulties in bridging the gulf between the political parties over fiscal policy.” It had argued that the “effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges”. Countries the world over must draw the right lessons from these episodes — political polarisation has economic consequences.