James Pethokoukis

Politics and policy from inside Washington

Is S&P’s debt warning creating a tax trap for Republicans?

April 18, 2011

The White House believes America’s debt problem is an important issue, but not an urgent one. Bond rating firm S&P seems to think differently:

Standard & Poor’s Ratings Services said today that it affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the U.S. Standard & Poor’s also said that it revised its outlook on the long-term rating of the U.S. sovereign to negative from stable. …

Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable. …

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. f iscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns….

“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” Mr. Swann said. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.”

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“  would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

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