The $85 billion in across-the-board sequestration cuts is not enough in deficit reduction to forestall another downgrade of the nation’s “AAA” credit rating, say top credit ratings agencies.
The key to protecting America’s credit rating, say analysts, is lowering the nation’s debt-to-GDP ratio. The federal debt is projected to go from 72% of GDP in 2012 to 87% in 2022. Economists say economic growth accelerates for nations that keep their debt-to-GDP ratio at or below 60%. Projections from the Peter G. Peterson Institute put America’s debt-to-GDP ratio at 200% in 27 years.
The sequestration cuts help, says Fitch Rating’s Global Managing Director for Sovereign Ratings David Riley, but the manner in which they occurred did little to assure that America’s political system is on a stable and sustainable path to deficit reduction.
“It’s not the most ideal outcome,” said Riley. “You’d rather have intelligent cuts and some revenue measures as well… but we don’t live in an ideal world, and it’s better to have some deficit reduction than none at all.”
Fitch Ratings says even after the sequester, America still needs another $1.6 trillion in deficit reduction to be on a sustainable path and another $3 trillion to put the nation’s debt-to-GDP ratio on a downward trajectory.
Fitch’s comments echo those Standard & Poor made when it lowered the nation’s credit rating.
“The political discord around this process was a factor in lowering the credit rating,” said S&P spokesperson John Piecuch. “We believe that the events since then have validated our opinion.”
While Fitch and Moody’s Investors Service still give the U.S. their top credit rating, both have placed the U.S. on a negative outlook.