S&P Downgrades Outlook for U.S. Based on Gridlock

Reporting on Politics and Policy.
April 18 2011 10:41 AM

S&P Downgrades Outlook for U.S. Based on Gridlock

It's not quite clear from the stories about S&P's decision, so here, for your reading/hand-wringing pleasure, is the bulk of S&P's announcement that it's revising its outlook on U.S. bonds "to negative from stable." The moody assessment is all about politics.

"More than two years after the beginning of the recent crisis," said S&P's Nikola G. Swann in a statement, "U.S. policymakers have still not agreed on how to reverse recent fiscal  deterioration or address longer-term fiscal pressures."

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Here's what he means. I've highlighted the key pieces.

In 2003-2008, the U.S.'s general (total) government deficit fluctuated  between 2% and 5% of GDP. Already noticeably larger than that of most 'AAA'  rated sovereigns, it ballooned to more than 11% in 2009 and has yet to  recover.     

On April 13, President Barack Obama laid out his Administration's  medium-term fiscal consolidation plan, aimed at reducing the cumulative  unified federal deficit by US$4 trillion in 12 years or less. A key component  of the Administration's strategy is to work with Congressional leaders over the next two months to develop a commonly agreed upon program to reach this target. The President's proposals envision reducing the deficit via both  spending cuts and revenue increases.     

Key members in the U.S. House of Representatives have also advocated  fiscal tightening of a similar magnitude, US$4.4 trillion, during the coming 10 years, but via different methods. House Budget Committee Chairman Paul  Ryan's plan seeks to balance the federal budget by 2040, in part by cutting  non-defense spending. The plan also includes significantly reducing the scope  of Medicare and Medicaid, while bringing top individual and corporate tax  rates lower than those under the 2001 and 2003 tax cuts.     

We view President Obama's and Congressman Ryan's proposals as the  starting point of a process aimed at broader engagement, which could result in  substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional  negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the  first budget proposal that could include related measures would be Budget 2014  (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond  that time is possible.     

Standard & Poor's takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate.  But for any plan to be credible, we believe that it would need to secure support from a cross-section of leaders in both political parties.     

Left unsaid here are the inconsolable issues: Republicans won't give on tax increases, and Democrats won't give on entitlements. At least some piece of this has to be reaction to the debt ceiling hokey-pokey.

David Weigel is a reporter for Bloomberg Politics

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