Moody’s Investors Service wasted no time pointing out that the “fiscal cliff” drama had very little to do with American government’s long-term financial security, and they’re content to settle back and munch popcorn while they wait for the real show to start. As reported by The Hill:
[Moody’s] said a deal over raising the debt limit, which could include new spending cuts, tax hikes and entitlement reforms, could determine whether the nation’s credit rating is downgraded.
“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,” the agency said.
The Treasury Department said the U.S. reached its $16.4 trillion debt limit on Dec. 31, but that extraordinary measures can be taken for roughly the next two months to keep paying the nation’s bills.
The credit rater said the deal hammered out by Congress and the White House on taxes is merely a first step, and the U.S.’s credit rating could be affected “negatively” if Washington fails to take further steps to rein in the deficit. In fact, it said it was “necessary” for policymakers to adopt further measures to bring down the deficit to keep the U.S. rating intact.
This shouldn’t surprise anyone, since the fiscal cliff agreement has no significant effect on the deficit. The money raised by its tax increases don’t stack up very well against the titanic spending and borrowing practiced by the federal government, and even more spending was packed right into the fiscal cliff deal. Moody’s is concerned with the bottom line, and cares little for the emotional and political appeal of allowing the Sainted Middle Class to escape paying for its government. They’re well aware that economic growth is the key to producing the revenue necessary to address debt on the scale Washington has imposed. They’re even a little dubious about the end of the “payroll tax cut” that President Obama once championed, but now seems to have forgotten about completely:
The bill approved by the House and Senate raises tax rates on annual incomes above $450,000 for families and $400,000 for individuals.
But the rater noted that the increased revenue is “far outweighed” by the cost of extending tax cuts for income below that level, the permanent patch to the alternative minimum tax and other tax breaks.
The Congressional Budget Office has said the deal would add $3.97 trillion to deficits over the next decade.
Moody’s noted that while the package’s overall impact on the economy is positive, the expiration of the payroll tax cut is going to put a pinch on economic growth. And the ultimate fate of the sequester could further hinder economic growth depending on how Congress deals with it, Moody’s added.
An assessment of the fiscal cliff deal from the other big credit agencies is still pending, but it’s likely they will join Moody’s in devoting far more interest to the upcoming debt ceiling drama. As for the fate of the sequester, the delicate ringing sound you can hear emanating from Capitol Hill is the sound of hundreds of ruby slippers being tapped in unison.