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Fitch US Credit Downgrade Should Be a Wake-Up Call

Fitch Ratings, which is one of the three major credit rating agencies, just downgraded the U.S. debt from AAA to AA+. The last time this happened was 2011 when the debt ceiling stalemate forced the federal government to shut down. Before that, U.S. debt always carried a AAA rating. This time, the downgrade should serve as a wake-up call to our federal government elected officials.

The federal government has spent more money than it received in tax revenue in 56 of the last 60 years. The accumulated debt now totals more than $32 trillion, with most of that debt incurred since 2001. This reckless spending has caused numerous problems. Fitch says the downgrade was necessary.

Fitch wrote, “There has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.” Fitch continued, “The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

The federal government should now wake up and really do something about the problem instead of kicking the can down the road, which is what the last four administrations have done.

The federal government must find a way to pay back what was borrowed. Right now, there is no program in place to ever repay any of the debt. When an annual deficit occurs, the government sells 10- or 20-year bonds to finance the deficit.

When the bonds mature and must be repaid, there are no funds to do so, since the budget is always in deficit. So, what happens? New bonds are sold to pay back the old bonds and the debt is rolled over. There is never a reduction in the debt unless the government can run a surplus in the annual budget.

This downgrade means that all interest rates will increase. The government will pay higher rates on bonds. This will filter through the economy so that all interest rates on loans for cars, houses, business loans and personal credit will rise.

The GOP led House of Representatives passed a bill to raise the debt ceiling and reduce government spending last Spring. The Senate would not consider the bill and President Biden indicated he wouldn’t sign it. That forced House Speaker Keven McCarthy to make a last-minute deal with the Dems to raise the debt ceiling without reductions in government spending.

Why is it so difficult to reduce the annual deficit?

Last year the federal government spent $6.3 trillion while revenues were only $4.9 trillion. To reduce the deficit, either tax revenue must increase, or spending must decrease. Raising tax rates higher than they are now will likely result in less, not more tax revenue. That’s because higher tax rates tend to slow economic growth, so that the higher rates will be applied to less income often resulting in less tax revenue.

Besides, nearly every American believes they are taxed enough already.

The only solution is to reduce government spending. But that’s very difficult, because more than 60% of spending goes for entitlement programs: Social Security, Medicare, Medicaid and other income security programs. Politically this is difficult to reduce.

Nearly 10% of the budget pays interest on the ever-growing public debt. That obviously must be paid. The remaining, almost 30%, is split nearly evenly between defense spending and social programs.

As I have noted in prior columns, the only reasonable solution to reduce government spending is to gradually raise the eligibility age for Social Security and Medicare to at least 70 and probably 72 in the future. While this is not a good solution to the probable, this solution is probably the least bad.

Before the credit of the US government suffers more downgrades, the issue of large annual budget deficits and a far too large public debt must be addressed. Perhaps the first thing to do is to eliminate the annual deficit.

After all, if someone is stuck in a deep hole, the first thing to do is to stop digging.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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