On Election Day, the State Department invited a top economic analyst to brief a group of foreign journalists on the U.S. economy. The analyst’s message was clear: the U.S. is getting downgraded again.
Kathy Bostjancic, director of Macroeconomic Analysis for the Conference Board, responded to a question from a reporter from the Egyptian newspaper Al Wafd by predicting that U.S. Treasury securities—the means by which the U.S. government finances its debt–will be downgraded again.
The Egyptian asked what impact the so-called “fiscal cliff” facing the U.S. federal government would have on the rating of U.S. Treasury securities.
“I mean, to me, it seems the odds of us getting downgraded again are very high,” said Bostjanic. “But I think that they [Republicans and Democrats] get around the sequestration, and I think by consequence, because they’re not going to find an agreement on how to offset that in the budget, we’re going to get downgraded.”
In 2011, ratings agency Standard & Poor’s downgraded the U.S. debt to AA+ from AAA, after Congress and President Barack Obama agreed to raise the debt ceiling by $2.4 trillion. Analysts have said another downgrade would cause investors to lose more confidence in U.S. Treasury bills, which would put the world into a greater state of economic uncertainty.
The “fiscal cliff” is the colloquialism used to describe a series of federal tax increases and spending limitations scheduled to automatically take affect at the beginning of 2013. Among the automatic tax increases, as summarized by the Congressional Research Service, are the termination of all the lower marginal income-tax rates enacted under President George W. Bush, the termination of the “patch” in the Alternative Minimum Tax that now protects about 27 million middle-class American households from having to pay a higher federal tax rate, and the 2-point cut in the 12.4 percent Social Security payroll tax that President Obama signed into law in 2010.
The automatic spending limitations include a $54.7 billion reduction in currently planned fiscal 2013 defense spending and a similar $54.7 billion reduction in currently planned fiscal 2013 non-defense spending.
The so-called “sequestration” of this $109.4 billion in fiscal 2013 federal spending was included in the Budget Control Act, which legislated the deal that President Obama and House Speaker John Boehner negotiated in August 2011 to increase the federal debt limit by $2.4 trillion. The Treasury reported last week that it now expects this $2.4 trillion increase in its borrowing authority also to be exhausted by the end of this year.
Another element of the fiscal cliff is that the fees Medicare now pays to doctors for serving Medicare patients will be automatically cut by 27 percent across the board next year.
This is what is coming and yet we elected to send people back to Washington who believe that to pile additional taxes and additional spending on top of these is the answer to our problems. They will attempt, perhaps, to kick the problems of a “fiscal cliff” a little farther down the road, but they won’t be able to eliminate it. It will still loom before us and a downgrade will only make it worse when we get there.