Late on Tuesday, Fitch Ratings became the second of the three biggest credit-rating companies to drop the United States government’s coveted triple-A ranking. This led to a fight about spending and tax policies in Washington.
Fitch said that the main reasons it went from AAA to AA+ were that the federal government’s debt was getting worse and that politics made it hard for the U.S. government to make choices about spending and taxes.
Fitch said its decision “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” compared to other countries with similar debt ratings.
The cut might not have much of an effect on the financial markets or the interest rates that the U.S. government will pay in the long run. Here’s what you need to know:
Fitch’s move comes just a few weeks after the White House and Congress decided whether or not to raise the limit on how much the government can borrow. At the end of May, the debt limit was raised for two years, and spending was cut by about $1.5 trillion over the next ten years as part of a deal. Janet Yellen, the Secretary of the Treasury, said that the government would stop paying its bills if talks didn’t end by a specific date.
The move really upset the Biden government. Yellen said on Wednesday that Fitch’s flawed rating is based on old data and needs to take into account the changes we’ve seen in a number of areas, including governance, over the past two and a half years.
“Despite the deadlock, both parties have worked together to pass a bill to solve the debt limit problem,” said Yellen.
But Douglas Holtz-Eakin, president of the American Action Forum and former head of the Congressional Budget Office, said that Fitch made the right decision because Washington isn’t doing much to fix the government’s long-term budget shortfall.
“This is about a fundamental mismatch between the growth of our spending and our ability to bring in money over the long term,” he said.
In 2011, after another standoff over the borrowing limit, Standard & Poor’s took away the U.S. debt’s coveted triple-A grade.
Fitch said that the size of the U.S. economy, compared to the size of the government’s debt, will go up from almost 113% this year to more than 118% in 2025. This is more than 1.5 times higher than what countries with triple-A or even double-A grades usually do.