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Global Credit Research - 02 Jan 2013
New York, January 02, 2013 -- Moody's Investors Service said that the fiscal package passed by
both houses of Congress yesterday is a further step in clarifying the
medium-term deficit and debt trajectory of the federal government.
It does not, however, provide a basis for a meaningful improvement
in the government's debt ratios over the medium term. The
rating agency expects that further fiscal measures are likely to be taken
in coming months that would result in lower future budget deficits,
which are necessary if the negative outlook on the government's
bond rating is to be returned to stable. On the other hand,
lack of further deficit reduction measures could affect the rating negatively.
Notably, yesterday's package does not address the federal
government's statutory debt limit, which was reached on December
31. The need to raise the debt limit may affect the outcome of
future budget negotiations.
Although the fiscal package raises some revenue through higher tax rates
on individuals earning more than $400,000 ($450,000
for joint filers) and through some other smaller measures, the estimated
amount of increased revenue over the next decade is far outweighed by
the amount of revenue foregone through the extension of lower tax rates
for those with incomes below $400,000, the indexation
of the alternative minimum tax, and other measures.
The Congressional Budget Office (CBO) estimates that the net increase
in budget deficits from the fiscal package when compared to its baseline
scenario (which assumes taxes on all income levels would increase) is
about $4 trillion over the coming decade, excluding higher
interest costs on the resultant higher debt. Based on that estimate,
a preliminary calculation by Moody's shows that the ratio of government
debt to GDP would peak at about 80% in 2014 and then remain in
the upper 70 percent range for the remaining years of the coming decade.
Stabilization at this level would leave the government less able to deal
with future pressures from entitlement spending or from unforeseen shocks.
Thus, further measures that bring about a downward debt trajectory
over the medium term are likely to be needed to support the Aaa rating.
The macroeconomic effects of the package are positive, since it
averts the recession that would likely have occurred had personal income
taxes gone up for all income levels. However, the increase
in the Social Security payroll tax from 4.2% to 6.2%
of income that became effective on January 1 will likely be a constraint
on growth in coming quarters. Furthermore, expenditure cuts
that may be decided in coming months could also affect the rate of GDP
growth in the near term. Overall, therefore, the recent
package mitigates part of the fiscal drag on the economy associated with
the fiscal cliff but does not eliminate it.
The statutory debt limit was reached on December 31, and the Treasury
indicates that its extraordinary measures may be sufficient to maintain
normal expenditure levels for approximately two months. Nonetheless,
the debt limit will have to be raised in February or early March.
At the same time, the fiscal package passed yesterday delayed the
implementation of spending cuts mandated by the Budget Control Act of
2011 for two months. Therefore, it seems likely that new
measures addressing the expenditure side of the budget will be negotiated
at around the time the debt limit will need to be raised.
Although Moody's believes that the debt limit will eventually be
raised and that the risk of default on Treasury bonds is extremely low,
this confluence of events adds uncertainty to the outcome of negotiations.
However, the spending measures that result from the negotiations
will form part of the medium-term outlook for the budget deficit.
Moody's will need to consider these measures in assessing the rating
outlook. Further revenue measures may also form part of the negotiations.
The debt trajectory resulting from this process is likely to determine
whether the Aaa rating is returned to a stable outlook or downgraded to
Aa1, as Moody's stated last September.
Steven A. Hess
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Sovereign Risk
Sovereign Risk Group
Moody's Anticipates Further US Fiscal Action Following "Fiscal Cliff" Deal
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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