On Tuesday, Fitch Ratings, one of the major credit rating agencies, announced the downgrading of the long-term credit rating of the United States. Citing the nation’s high and growing debt burden, coupled with a propensity for fiscal brinkmanship over the government’s authority to borrow money, Fitch lowered the rating from AAA to AA+. This marks the second time in history that the U.S. credit rating has been downgraded, with the previous instance occurring in 2011 amid a debt-limit standoff.
The Looming Shutdown
The recent downgrade comes merely two months after the United States narrowly averted defaulting on its debt. Lawmakers engaged in prolonged negotiations over whether the nation should be permitted to take on more debt to meet its financial obligations. Eventually, Congress reached a last-minute agreement in May to suspend the debt ceiling, thereby enabling the U.S. to continue borrowing money. Despite the temporary resolution, the federal government now faces the possibility of a shutdown this fall, as lawmakers clash over how, where, and to what extent federal funds should be allocated. The continuous political wrangling over federal spending played a significant role in Fitch’s decision to downgrade America’s debt.
Fitch’s statement expressed concern over the lack of a medium-term fiscal framework and a complex budgeting process within the U.S. government. The agency pointed to the mounting levels of U.S. debt in recent years, resulting from new tax cuts and spending initiatives, and noted limited progress in addressing challenges related to the rising costs of programs like Social Security and Medicare.
The downgrade could have implications for investors, as it might restrict the number of investors able to purchase U.S. government debt. Some investors have constraints regarding the quality of debt they can buy, and those requiring a pristine credit rating across all major rating agencies may need to seek other investment options. However, analysts suggest that the impact might not be severe due to the sheer size of the Treasury market and the ongoing demand for U.S. Treasury securities. Nevertheless, the downgrade serves as a blot on the nation’s fiscal management record. The Biden administration has responded firmly, disputing Fitch’s methodology and asserting that the downgrade fails to reflect the robustness of the U.S. economy.
The Blame Game
Biden administration officials, speaking anonymously, disclosed that they had been briefed by Fitch before the downgrade and had expressed their disagreements. Fitch had expressed concerns about U.S. governance in light of the January 6, 2021, insurrection. Senate Majority Leader Chuck Schumer attributed the downgrade to Republican refusals to raise the borrowing cap without significant concessions, urging them to stop using the debt limit as political leverage.
While the debt limit agreement reached in June includes spending cuts of $1.5 trillion over a decade, it falls short of making substantial reductions to costly initiatives such as retirement programs. Consequently, the national debt, already surpassing $32 trillion, is projected to exceed $50 trillion by the end of the decade. Despite the downgrade, it is unlikely that lawmakers will drastically alter the fiscal trajectory of the United States. Most expect Congress to respond with criticism rather than effectuating change or fiscal discipline.