Sep 26, 2023 - Economy

Why the U.S. fiscal picture really is ugly

Illustration of a one dollar bill with George Washington reaching out for a pinky promise.  

Illustration: Aïda Amer/Axios

Most triple-A countries — think Germany or Canada — carefully plan out their fiscal trajectory over the next five to 10 years. The U.S. can't even credibly promise to pay its employees next week. As a result, it's now at risk of losing the last of its much-coveted triple-A credit ratings.

Why it matters: America's economic and military might have combined to allow a level of fiscal complacency within its government that's incompatible with a risk-free rating.

The big picture: The U.S. government has lost control of its own spending, both in the short term and in the long term. That was the message sent by Fitch when the ratings agency downgraded the U.S. last month, and it's the message that was sent Monday by Moody's as we hurtle toward a government shutdown on Oct. 1.

  • The Fitch downgrade attracted plenty of criticism — and its timing was curious, coming right after a successful resolution of the debt limit. But the firm's analysts may have had a point.

How it works: For U.S. government debt to be risk-free, the U.S. government has to be willing and able to service that debt and keep it under control.

  • Standard & Poor's determined those conditions were no longer met back when it stripped the U.S. of its triple-A credit rating in 2011, citing a weakening in "the effectiveness, stability, and predictability of American policymaking and political institutions."
  • Fitch agreed when it announced its downgrade in August, saying "there has been a steady deterioration in standards of governance over the last 20 years" and that "repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management."
  • Moody's has now weighed in as well. Its note on the "potential credit implications of a government shutdown" bemoans "the weakness of US institutional and governance strength" and the "fractious bipartisan politics around a relatively disjointed and disruptive budget process." A downgrade from the agency is now a real possibility.

Between the lines: The U.S. Treasury Department has an idiosyncratic definition of default whereby any missed payment is a default, but only if that missed payment is caused by the government running out of money.

  • In each of 20 separate shutdowns since 1977, the government missed payments it had promised — not to bondholders, but certainly to federal employees.
  • In the Treasury's eyes, those missed payments were a "lapse in appropriations" rather than a default. They would have been a default if (and only if) they had been caused by the debt ceiling rather than by a shutdown.
  • The ratings agencies don't consider shutdowns to be defaults either, but they do consider the main cause of shutdowns — government dysfunction — to be the main cause of defaults. Any country regularly seeing a government shutdown can't credibly be considered risk-free.

By the numbers: Moody's expects federal interest payments to reach 4.6% of GDP in 2033, well over double the 1.9% in 2022, thanks to "Congress' consistent inability to agree on annual budgets and pass appropriations funding."

Zoom out: Moody's notes that "aligning political support around a comprehensive, credible multi-year plan to arrest and reverse widening fiscal deficits" — something both sides of the aisle can agree on in theory — "appears extremely difficult in the current highly polarized political environment."

The bottom line: The math of bringing down America's large deficits is not particularly hard. But fractured political institutions — particularly a substantial bloc of the Republican party that embraces burn-it-down politics — seem to have made it impossible to do so.

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