James Pethokoukis

Politics and policy from inside Washington

Why S&P would lurv Paul Ryan’s budget plan after all

Apr 20, 2011 19:14 UTC

Earlier today I noted that none of the major debt reduction plans floating around would meet S&P’s key financial metrics, as well as those of its competitors. At least this was the analysis of Goldman Sachs. Here is what I wrote (plus a pretty chart):

A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

But no fast. Jed Graham over at Investor’s Business Daily’s must-read Capital Hill blog says Goldman got it wrong:

Both Goldman and the policy arm of conservative GOP House members suggest that the U.S. could be in downgrade territory once interest payments exceed 14% of federal revenue.

That would happen in 2015 not only under President Obama’s initial budget plan, but also under the Ryan and commission plans.

So are we doomed? Hardly.

The 14% interest-to-revenue ratio applies not to the federal government, but to general government, which includes states and localities. This is a measure that Moody’s offers for international comparison purposes, since European governments tend to do most of the taxing and borrowing on behalf of localities.

The applicable danger zone for the federal government would be an interest-to-revenue ratio of 18%, which Steven Hess, Moody’s lead analyst for the U.S. rating, recently confirmed for IBD.

Under current projections, the federal government’s interest-to-revenue metric would peak at 17.o% in 2020 under Ryan’s plan. Under fiscal commission plan projections released in December, interest would peak at 15.6% of revenues in 2018, when revenues would be about $550 billion higher than under the Ryan plan.

5 reasons why S&P just guaranteed U.S. debt will lose AAA rating

Apr 20, 2011 14:04 UTC

By prodding Washington to agree on a debt plan, Standard & Poor’s might achieve just the opposite. Its dour take on Treasuries could inflame the debt-ceiling debate, leaving little energy for a grand budget compromise. And the severe austerity S&P desires would have few takers anyway. Consider the following:

1)  Obviously the rating agency hopes its unnerving note will nudge lawmakers into reaching agreement on taxes and expenditures. Inaction until after the 2012 national elections risks an actual downgrade of America’s AAA bond rating.

2) But striking some mega-deal doesn’t have top priority on Capitol Hill. First up is the battle over raising the debt ceiling. Democrats want a clean vote on a bill, while Republicans are trying to tack on various debt reduction measures. The GOP quickly pointed to S&P’s statement as further justification of its bargaining position.

3) That the rating agency made no mention of the debt ceiling is irrelevant. Nor does it matter that Congress just released a report blaming S&P and its peers for triggering the financial crisis. Politicians take their friends where they can find them. And S&P’s warning is spurring Republicans to dig in. That helps ensure the negotiations will be arduous, requiring Capitol Hill’s nearly undivided attention until July and potentially pushing the country to the brink of default. There probably won’t be much chance to work on major changes to taxing and spending.

4) Such efforts didn’t have much momentum anyway. A bipartisan “Gang of Six” in the Senate is working on a proposal that draws on recommendations from the president’s debt panel. And it was gaining support among Republicans until House Budget Chairman Paul Ryan released his plan.

5) Even if Congress moves toward compromise, making S&P happy won’t be easy. A key metric for the firm is the ratio of net interest payments to government revenue. Goldman Sachs found that all the major reform plans would still allow that ratio to increase to levels that rating agencies would probably consider worrisome.  Avoiding that would require defense cuts, immediate cuts to senior benefits and/or tax increases. Good luck with that.

interestchart

Given the acrimony, if S&P really wants Washington to act, it may find it actually takes more than a warning.

COMMENT

The Dems and the GOP have been playing us for fools for decades. Good cop…….bad cop. All the while lining their pockets. Time for term limits, public campaign financing and a return to fiscal sanity.

Posted by allan1776 | Report as abusive

The $4 trillion gap: Obama vs. Ryan, an apples-to-apples budget comparison

Apr 20, 2011 13:26 UTC

OK, let’s try and actually compare the new Obama budget plan — “The Framework for Shared Prosperity and Shared Fiscal Responsibility” — with Rep. Paul Ryan’s “Path to Prosperity.” My calculations — partly based on work done by Goldman Sachs — find that the Ryan Path would save more than double, 130 percent. In dollars, it’s a difference of $3.9 trillion (nearly 2/3 from higher taxes, net interest expense savings).

1) Obama says his plan cuts $4 trillion in debt over 12 years vs. … something or other. Ryan says his plan cuts $4.4 trillion over ten years vs. Obama’s original 2012 budget from February.

2) To do an apples-to-apples comparison, it’s necessary to a) plot them over the same time span; b) compare them against the same baseline and c) adjust them for similar economic assumptions. Goldman Sachs does the first two steps for me. It plots both plans vs. what the CBO calls its “alternate” baseline — the one it thinks most likely. (For instance, it does not assume all the Bush tax cuts get repealed like the main CBO baseline does.) Goldman thinks that’s what the White House did, too.

3) Goldman Sachs also adds back in Obama’s pledge to let the top-end Bush tax cuts expire, something which isn’t clear from Obama’s speech or subsequent White House fact sheet. Here is the chart of Goldman’s findings:

goldmanchart

5) Those savings – 2.4 percent for Obama, 3.5 percent for Ryan — are over ten years vs. cumulative GDP of $196 trillion over 2012-2021 (not counting interest expense). In dollar amounts, that works to savings of $4.7 trillion for Obama and $6.9 trillion for Ryan. So the Ryan Path saves $2.2 trillion more.

6) But that’s not all! The Obama Framework likely uses the same higher growth assumptions as Obama’s February budget. When CBO re-ran that budget using its own gloomier forecast, it found the Obama plan raised $1.7 trillion less than it claimed. Ryan uses the CBO numbers. So a back-of-the-envelope estimate — adjusted for similar economic assumptions — finds the Obama Framework would only save $3 trillion vs. $6.9 trillion for the Ryan Path over ten years. And nearly 2/3 of Obama’s savings comes from higher taxes (net interest).

COMMENT

Two points:
1) Can you explain a little why you took the 2.4 number instead of the 3.4 number, it seems like your assuming the 2.4 because you assume Obama is not going to let the bush-era tax cuts expire (even though it seems like he pretty explicitly said he would).

2) You mention Obama’s rosy economic forecast, but you did not mention Ryan’s pretty unbelievable forecast
(from http://mobile.nationaljournal.com/budget  /ryan-plan-pushes-optimism-to-the-outer -limits-20110405)

“If Rep. Paul Ryan’s newly unveiled 2012 budget is signed into law, this is what Ryan’s economic forecasters say will happen: The unemployment rate will plunge by 2.5 percentage points. The still-sinking housing market will roar back in a brand new boom. The federal government will collect $100 billion more in income tax revenues than it otherwise would have.

And that’s just in the first year. By 2015, the forecasters say, unemployment will fall to 4 percent. By 2021, it will be a nearly unprecedented 2.8 percent.”

I don’t know if unemployment has ever been 2.8 percent. That seems very suspect to me.

Posted by ceptri | Report as abusive
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