A finger of blame has been pointed at The Joe Biden administration after the United States lost its AAA credit rating yesterday (Tuesday, August 1) – for only the second time in its history.
Fitch Ratings downgraded the key reliability score to AA+ – causing a stock market slump. Investors use the ratings as a benchmark for judging how risky it is to lend money to a government.
It comes amid growing concerns over the state of the nation’s finances and its debt burden. Fitch noted an “expected fiscal deterioration over the next three years” and “a high and growing general government debt burden” when it d It blamed an erosion of governance and rising general government deficits.
The Dow futures market slumped by about 100 points on the back of the downgrade. However, Treasury Secretary Janet Yellen dismissed the downgrade as “arbitrary”.
Nonetheless, Fitch said: “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”
However, it also suggested the George W Bush, Trump and Obama administrations also shared responsibility. It said: “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.”
It said the government “lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process”. And noted there has “been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population
As a result of this, Fitch said: “We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.
“Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average).”
