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Dueling Debt Ceiling Proposals vs. the Rating Agencies
Posted By Alison Acosta Fraser On July 25, 2011 @ 10:16 pm In Economics | Comments Disabled
As the day debt ceiling  of reckoning fast approaches, dueling proposals are flurrying around Washington fast and furious. The latest two are from House Speaker John Boehner  (R-OH) and Senate Majority Leader Harry Reid  (D-NV).
Americans, and global financial markets, are watching Washington nervously for a real plan—one that will put the nation squarely on a path to solving our twin crises of spending and debt. Without strong structural changes in spending, our debt will balloon out of control .
At stake are two issues. The short-term is obvious – will there be an increase in the debt limit before August 3? Despite the President and his team practically begging Wall Street to collapse, the markets and the rating agencies believe that there will be an increase and the federal government can safely avoid the chaos of prioritizing its bills in order to service the debt. Though they warn of the consequences if this doesn’t happen, Standard & Poor’s , has stated that
…the risk of a payment default is small, though increasing…Standard and Poor’s still anticipates that lawmakers will raise the debt ceiling by the end of July to avoid those outcomes.”
The second and even more crucial issue is whether Congress will take necessary action beyond the next year to bring our debt under control over the medium and long-term. This is where the rating agencies really voice their strong concern. Again, Standard & Poor’s:
Congress and the Administration might also settle for a smaller increase in the debt ceiling, or they might agree to a plan that, while avoiding a near-term default, might not, in our view, materially improve our base case expectation for the future path of the net general government debt-to-GDP ratio.”
Moody’s response is similar:
The outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction. To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.
What the rating agencies are saying  is that Congress and the President must pass legislation that immediately begins to rein in deficits and bring our debt down to more acceptable levels, and either keeps it there or continues to drive it down further.
The Boehner proposal would cut $1.2 trillion in discretionary spending. There is no assurance that these cuts will occur, but let’s assume they do. Let’s even be generous and assume that they are – in the words of S&P– “enacted and maintained throughout the decade.” This would cut debt held by the public from its projected $24.9 trillion  in 2021 to $23.7 trillion, and when measured against the economy from 104% to 99.4%. Certainly, this is an improvement, but it is hardly declining from today’s levels, nor would these cuts fundamentally restructure entitlements – the real driver of our deficits in the future.
Step two in the Boehner proposal would reduce deficits by an additional $1.8 trillion over ten years. Even assuming these cuts all happen, and even assuming they were all spending cuts – a broad assumption given the President’s rhetoric surrounding tax hikes on the wealthy – this would bring publicly held debt down to 92% of GDP. Better, but not that much. Even throwing in interest savings from deficit reduction would bring this down to 88%. Again, not much improvement and far worse than today’s debt ratio.
The Reid proposal doesn’t move the ball forward enough either. At best it falls somewhat short of Boehner’s $3 trillion by $800 billion ($1.2 trillion in discretionary and some confusing savings to be had from winding down operations in Iraq and Afghanistan of $1.0 trillion.)
Neither of this week’s dueling debt ceiling proposals would pass the test from Moody’s or Standard and Poor’s for a credible, firm and actionable plan that would turn the tide of our deficits to put our debt on a manageable track. And if that holds true, then a downgrade by the rating agencies could occur smack in the very election year the President is trying to scoot through.
Because spending is set to grow so significantly over the decade, the kind of onesie-twosie approach to cutting spending and increasing the debt limit is simply not adequate. Net interest payments are projected to more than triple over the next decade . The longer Congress waits to seriously control spending, the more it will have to cut just to offset bourgeoning interest costs. And if interest rates suddenly rise? Well, we have an even bigger problem on our hands.
And, as babyboomers flood into Social Security, Medicare and Medicaid swell in tandem, the kinds of changes necessary to rein in spending on these programs will be much more difficult. Here again, the longer they duck the problem, the more likely a meltdown ahead.
The fact is, the only plan that could likely pass muster with Moody’s and Standard and Poor’s is House passed, Cut, Cap and Balance . Why? They tackle spending with firm caps that are enforceable, and before the end of the decade bring spending down to 19.9% of GDP and keep it there. With the right spending changes it could fall, along with debt levels, from there. Congress must act now to rein in spending and get our debt under control. It’s time for the dueling to end.
Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2011/07/25/dueling-debt-ceiling-proposals-vs-the-rating-agencies/
URLs in this post:
 debt ceiling: http://www.heritage.org/issues/budget-and-spending/debt-ceiling
 House Speaker John Boehner: http://blog.heritage.org/2011/07/25/conservatives-beware-the-boehner-plan-leads-to-tax-increases/
 Senate Majority Leader Harry Reid: http://nationaljournal.com/congress/boehner-outlines-two-step-plan-vote-could-come-wednesday-20110725
 debt will balloon out of control: http://www.heritage.org/budgetchartbook/national-debt-skyrocket
 Standard & Poor’s: http://www.reuters.com/article/2011/07/21/idUSN1E76K1ZA20110721
 What the rating agencies are saying: http://blog.heritage.org/2011/07/15/what-moodys-really-told-boehner-and-obama-about-the-debt-ceiling/
 debt held by the public from its projected $24.9 trillion: http://www.heritage.org/research/reports/2011/01/new-cbo-budget-baseline-reveals-permanent-trillion-dollar-deficits
 more than triple over the next decade: http://www.heritage.org/BudgetChartBook/budget-net-interest-spending
 Cut, Cap and Balance: http://blog.heritage.org/2011/07/20/morning-bell-liberals-invoke-reagan-to-sell-debt-deal/
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