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  • Moody's: Further Deficit Reduction Needed to Maintain Stable Outlook

    RICHARD B. LEVINE/Newscom

    RICHARD B. LEVINE/Newscom

    Moody’s changed the outlook on the U.S. credit rating from negative to stable this week, citing improving deficits. While this is good news, policymakers should curb their enthusiasm about what this means for the U.S. debt situation.

    The improvement could be fleeting, as Moody’s relies heavily on favorable economic growth projections and assumes only moderate increases to interest on the federal debt. The ratings agency also warned that further deficit reduction is needed to address rising spending on government health care programs and Social Security over the longer term.

    The short-term improvement in the U.S. deficit comes on the heels of a growth-slowing major tax increase affecting nearly all Americans and signed into law by President Obama in December. Moreover, an improving housing market has increased the dividends the Treasury is collecting from mortgage giants Fannie Mae and Freddie Mac.

    On the spending side, Part 2 of the Budget Control Act’s spending reductions—sequestration—reduced spending in the discretionary budget for 2013. And contrary to President Obama and others who predicted economic damage, the U.S. economy largely shrugged off these cuts.

    According to Moody’s, the U.S. economy “has demonstrated a degree of resilience to major reductions in the growth of government spending.”

    But sequestration reduces projected spending over the next decade by only about 2.5 percent. Major reductions in the growth of government spending still need to be enacted.

    Among the largest risks today is complacency on the part of lawmakers in response to the short-lived improvement in the U.S. fiscal situation. Deficits projected at $642 billion by the Congressional Budget Office for this year are “low” only when compared to their trillion-dollar-plus levels over the past four years. The U.S. deficit and debt situation actually worsened as a result of the recession, and corrective measures are even more urgent now than they were in 2007.

    U.S. fiscal consolidation (a wonky term referring to policies aimed at reducing a country’s deficits and debt) is becoming more and more urgent as time passes and an increasing share of baby boomers start drawing from Social Security and Medicare. Obamacare’s new massive and expensive entitlements would add yet more to the spending burden. In Moody’s assessment:

    [D]espite the more favorable fiscal outlook over the next several years, without further fiscal consolidation efforts, government deficits are anticipated to increase once again over the longer term. If left unaddressed, over time this situation could put the rating again under pressure.

    Reductions in government entitlement spending are unavoidable to put the budget on a path to balance, and they would have significant economic benefits. And yet entitlement spending largely grows on autopilot without regular congressional review. The upcoming debt ceiling debate is Congress’s opportunity to correct the long-term fiscal outlook. Moody’s stated: “Even if there’s some delay, we’re not too concerned about [the debate on the debt ceiling] affecting the government’s ability to service its debt.”

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