In a recent move that has left both Wall Street and Washington perturbed, Fitch Ratings downgraded the United States debt from AAA to AA+. However, this credit downgrade might merely be a glimpse into a much graver issue at hand – the mounting and spiraling national debt in the United States. The downgrade serves as a stark warning to the political class, which seems to have ignored the urgent need for fiscal responsibility.
Fitch Ratings attributed the downgrade to several significant factors that have contributed to the deterioration of the U.S. fiscal outlook. Firstly, the expected fiscal deterioration over the next three years has been a critical concern. The ratio of U.S. debt held by the public to GDP has surged from 65.5% in 2011, when the last debt downgrade occurred, to a staggering 98.2% this year. This surge has been further fueled by the government’s excessive spending and inadequate revenue to keep pace with it.
Another pivotal reason behind the downgrade is the high and growing general government debt burden, which includes state and local government debt. Alarmingly, this figure stands at over two-and-a-half times greater than the median 39.6% of GDP for countries with a AAA rating. The lack of fiscal discipline, coupled with a broken budget process and unreliable tax and spending estimates, has contributed to this ballooning debt crisis.
It seems that even the infamous debt-limit standoffs didn’t do any good in restraining expenditure in Washington. Moreover, the larger picture reveals a distressing trend of runaway spending, exemplified by the deficit in the first nine months of this fiscal year skyrocketing to $1.39 trillion, a whopping 169% increase compared to the previous year.
Furthermore, the growing chorus of entitlement spending remains unaddressed. Both the Biden and Trump administrations have shown little interest in reforming entitlements, despite the inevitable explosion in costs as baby boomers retire. The failure to curb entitlement spending, combined with ambitious plans to expand entitlements by trillions of dollars, raises serious concerns about the long-term sustainability of the U.S. fiscal trajectory.
The credit downgrade serves as a stark reminder that the U.S. cannot rely solely on the exorbitant privilege of the dollar’s status as the world’s reserve currency. While this privilege has shielded the nation from more frequent downgrades, it is not guaranteed in perpetuity. Things may change very quickly, and if the US government carries on spending at the current rate, this may happen earlier than we can imagine.