The U.S.’s gold-plated credit rating could be called into question if policy makers entertain further deficit-widening measures in the roughly ninth year of economic expansion, warn analysts at Fitch Ratings.
The credit-ratings firm affirmed the U.S.’s triple-A grade on the back of a strong economy and the dollar’s reserve-currency status, but cautioned that the U.S. would need to make changes to stave off further scrutiny over its sovereign debt rating. Fitch and Moody’s have branded the U.S. debt as pristine, even as S&P downgraded the U.S.’s debt back in 2011.
Opinion: Opinion: Forget about Triple-A, America’s bonds should be rated F
“While there has been a recent loosening in fiscal policy, Fitch considers debt tolerance to be higher than that of other sovereigns. However, rising deficits and debt could eventually test these credit strengths, in the absence of reform,” the analysts at Fitch said.
The ratings firm specifically homed in on the tax cuts passed in December 2017, and the lift to defense and nondefense spending caps for the next two fiscal years. The climbing budget shortfalls would push the Treasury Department to issue more than a trillion dollars worth of bonds in the fiscal year of 2018.
See: Should the bond market freak out about a $1.1 trillion deficit?
With the U.S. economy on its second-longest expansion, the concern is the government won’t have the fiscal wherewithal to prop up the economy when the next recession arrives.
Fitch forecast the general government deficit to hit 5% of GDP in 2018 and 6% in 2019. Their long-term analysis also hinted that government debt levels could surge to 129% of GDP by 2027, upping the forecast by an additional 16% since their last review of the U.S. sovereign credit.
If debt levels rise faster than forecast, it could lead Fitch to downgrade the U.S. status to negative from stable, a sign that a ratings downgrade could be on its way.
These projections assume higher borrowing costs, slower growth and a widening deficit will contribute to the deterioration of the U.S.’s public finances.
Read: U.S. February budget report shows first sign of wider deficits to come
Fitch Ratings listed others factors that could hurt the U.S.’s creditworthiness.
In a reflection of President Donald Trump’s anti-immigration rhetoric and complaints against trade, Fitch said “more restrictive trade or immigration policies” could hamstring long-term growth. This comes as investors fret over the potential for a trade war as the U.S. and China levies tit-for-tat tariffs.
Despite a litany of warnings, the U.S. did have options it could take to ease the strain on its public finances from an aging population and mandatory pension spending. Fitch said the social-security trust fund’s assets would start to be depleted starting in 2020, without any amendments.
A combination of tax hikes and reform of entitlement spending could help resolve the problem, though they conceded either option was “not on the political agenda,” said Fitch.
Source : MTV
