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Global Credit Research - 23 Nov 2011
New York, November 23, 2011 -- The Aaa government bond rating for the United States is unaffected by
the lack of a deficit reduction agreement by the Joint Select Committee
on Deficit Reduction, Moody's Investors Services says,
citing the $1.2 trillion in deficit reduction to come from
automatic spending caps beginning in January 2013. The lack of
an agreement by the committee does not change the US fiscal outlook from
what was legislated in the Budget Control Act of August 2, according
to Moody's, echoing comments made on November 1. The
rating agency said, however, that the committee outcome indicates
that significant deficit reduction measures are unlikely to be adopted
before the November 2012 elections. Moody's currently has a negative
outlook on the US rating given the need over time for further deficit
reduction to reverse the country's upward debt trajectory.
The Budget Control Act included about $900 billion in deficit reduction,
to be followed by at least $1.2 trillion coming from either
legislation proposed by the committee or automatic caps ("sequestration")
on spending that become effective beginning in January 2013. Although
the committee could have proposed considerably more than $1.2
trillion in deficit reduction measures, which would have been positive
for the government's creditworthiness, its failure to do so
does not decrease the amount of deficit reduction already legislated.
While a change in the composition of the spending cuts would not be a
major rating consideration, a reduction in the total amount that
would increase the projected increase in federal debt over the coming
decade could have negative rating implications. The sequestration
measures that become effective in 2013 include about $1.0
trillion in spending cuts below what is currently projected, plus
about $200 billion in interest savings because of lower debt levels.
Of the spending cuts, about half would come from defense spending,
with the majority of the remainder coming from discretionary spending
programs but a portion from payments to Medicare providers and insurance
plans. Some members of Congress appear to favor changing the mix
of these spending cuts to lessen the impact on defense spending.
Moody's believes that over time further deficit reduction measures
will be necessary to reverse the upward debt trajectory --
the principal reason behind the negative rating outlook assigned on August
2. While the committee outcome does not directly affect the fiscal
outlook, it lowers the probability that further deficit reduction
measures will be adopted before the November 2012 elections.
Without further measures, one of the most important medium-term
questions concerning the fiscal outlook is the level of personal income
tax rates beginning in 2013. The so-called "Bush tax
cuts" will expire at the end of 2012, meaning that tax revenues
will rise significantly at that time if there is no change in the law.
If this indeed occurs, the upward trend in the ratio of federal
debt to GDP could well be reversed in the middle of the decade,
assuming that economic growth is maintained at a moderate rate.
Over the longer term, entitlement programs are also crucial to the
fiscal outlook.
In the short term, the committee outcome may also have implications
for other fiscal measures that would affect the deficit and debt levels
in 2012, because the same divisions that prevented a deficit agreement
may continue to affect the legislative environment. Other potential
measures include an extension of the temporary payroll tax reduction and
extended unemployment benefits, which expire at the end of this
year. The administration has proposed extending these measures
through 2012, which would increase the budget deficit in the coming
year but not the long-term debt trajectory. An increase
in payroll taxes and a reduction in unemployment benefits next year could
have an important effect on economic growth because of the effect on personal
consumption expenditure, which in recent months has shown some strengthening.
Lower economic growth would affect overall government revenues.
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's: US Rating Unaffected by Deficit Committee Outcome
No Related Data.
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