Despite Fitch's Warning on US Credit Rating Downgrade... "Political Sphere Won't Change"

Recently, the credit rating agency Fitch downgraded the United States' national credit rating, citing political conflicts over raising the federal government's debt ceiling, fiscal deterioration, and the national debt burden as the background. However, it was pointed out that rather than addressing these issues, the political sphere is likely to continue excessive spending, tax cuts, and political strife in the future.

The daily Wall Street Journal (WSJ) reported on the 3rd (local time) that "Fitch's downgrade of the U.S. credit rating will not change Washington's existing habits." The outlet stated that Fitch's decision is actually fueling partisan disputes in the U.S., with both the Democratic and Republican parties not considering policies that could meaningfully resolve the issue.

[Image source=AP Yonhap News]

Shai Akabas, Director of Economic Policy at the bipartisan think tank Bipartisan Policy Center (BPC), pointed out, "There is no confirmed political will in Congress to resolve national budget and fiscal issues," adding, "This is a sign that worse things could happen if fiscal problems are not addressed."

On the contrary, the Biden administration is shifting the responsibility for this downgrade to the previous Trump administration. On the previous day, Treasury Secretary Janet Yellen called it a "completely unfair decision," arguing that Fitch's quantitative evaluation model did not reflect the improved related indicators since the Biden administration took office. Kevin Munoz, spokesperson for Biden's presidential campaign, also referred to this downgrade as the 'Trump downgrade,' claiming it was the result of the extreme MAGA Republican agenda. In response, the Republican side countered that the Democrats' excessive fiscal spending has derailed the economy.

According to the Congressional Budget Office (CBO), the federal government debt, which was about 22% of the U.S. Gross Domestic Product (GDP) in 2007, surged to 76% in 2011 and 110% this year. The national debt issue has become so severe that it exceeds the annual GDP.

In particular, WSJ pointed out that costs related to Social Security, Medicare, and Medicaid, which account for about two-thirds of total federal spending, will continue to rise due to population aging. The CBO estimates that Social Security spending as a share of GDP will increase from 5.1% in 2023 to 6.0% in 2033. The Social Security trust fund is also projected to be depleted by 2034.

Some members of Congress have proposed measures to completely reform the Social Security and Medicare systems, but WSJ diagnoses that these remain a third rail for both Democrats and Republicans. In previous debt ceiling discussions, both parties avoided touching Social Security and Medicare sectors, considering the votes indirectly or directly linked to related benefits. WSJ noted, "Politicians tend to wait until just before a potential disaster occurs," adding, "Ultimately, Congress will have to take action."

Tax cuts introduced during the Trump administration are also a key issue. Many of these tax cuts are set to expire in 2025. However, Fitch anticipated during the downgrade decision process that Congress would extend these tax cuts, reducing revenue and expanding deficits. Although voices calling for the repeal of tax cuts have emerged within the Democratic Party, this is likely to be blocked by Republican opposition. Even when Democrats controlled both the House and Senate in 2021, they failed to repeal some tax cuts. Additionally, plans by the Biden administration to raise corporate tax rates have been opposed by moderate Democrats and have stalled.

WSJ stated, "A low credit rating does not fundamentally change political calculations," and "Considering that the dollar is the world's reserve currency and global financial markets rely on U.S. Treasury securities, Fitch's downgrade will not shock policymakers much." Michael Strain, Director of Economic Policy Studies at the conservative think tank American Enterprise Institute, said, "The U.S. is in a very strong position, which is an appropriate judgment from investors," but added, "It is concerning that such (investor) judgments are fostering political complacency."

In another article, WSJ reported, "The best way for the Biden administration and Congress to prove Fitch wrong is to start addressing the nation's long-term fiscal problems, beginning with Social Security," adding, "The longer lawmakers delay, the more sacrifices Americans will have to make." The Washington Post (WP) also noted, "The White House criticized Fitch's decision, but there are reasons for the downgrade," and pointed out, "An AA+ rating on fiscal outlook may be overly optimistic and should serve as a warning to the political sphere."

This content was produced with the assistance of AI translation services.