Bond rating agency Fitch downgrades US debt, citing high spending, political infighting

The first week of August, Fitch, one of three bond rating agencies in the U.S., downgraded U.S. public debt from a rating of AAA to AA+. They cited “the expected fiscal deterioration over the next three years, a high and generally growing government debt burden, and the erosion of governance relative to AA and AAA related peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.” In essence, they cited too much spending, not enough revenue generation and too much political fighting. This has happened one time before in my lifetime as Standard & Poors downgraded U.S. debt from AAA to AA+ during the 2011 debt ceiling crisis.

Fitch’s decision came as our budget deficit for the first ten months of fiscal year 2023 came in at $1.6 trillion. Last year’s deficit through the first 10 months was $726 billion, an increase of $894 billion or a 123% increase in the deficit this year. What is so troublesome about this deficit is that it is more than double last year’s deficit and it comes at a time when we have a growing economy, no COVID pandemic, no other national emergencies, and no War on Terror (Iraq and Afghanistan). This is the kind of time when deficits should be declining, as they did during economic expansions in the past.

Let’s examine the details of what caused the large runup in the deficit. Revenues are down 10% while outlays are up 11%. Individual income taxes are down $442 billion and other receipts were down $109 billion, the bulk of which is accounted for in the decrease of $98 billion in payments from the Federal Reserve Bank.

On the expense side of the ledger, overall outlays are up $473 billion or 11%. Since this article is about the downgrade of our U.S. public debt, the single largest increase in outlays was an increase in interest costs on public debt of $146 billion up to a level of $572 billion, a substantial increase of 34%. The second largest increase was a $111 billion increase in Social Security payments, largely due to the unusually large cost of living increase because of inflation. The third largest increase occurred in Medicare payments, which increased by $104 billion. Other significant increases occurred in the student debt forgiveness plan of $71 billion and $52 billion for the three bank failure bailouts. Since the debt service for the first 10 months was $572 billion, if you extrapolate forward, this year’s interest rate cost will be in the vicinity of $686 billion.

In looking forward, the CBO also does 10-year projections, and the future doesn’t hold a lot of promise fiscally. Deficits over the next 10 years vary from a low of $1.6 trillion to a high of $2.9 trillion in 2033. The cumulative deficit is $20.3 trillion which averages $2.03 trillion per year. The so-called mandatory spending, which is comprised of Social Security payments, Medicare and Medicaid, go from outlays of $3.8 trillion to a projected $6.1 trillion in 2033. The cumulative total of mandatory payments amounts to $48.2 trillion. Clearly, this kind of fiscal performance is unsustainable. Yet, the administration and Congress refuse to deal with the elephant in the room.

Where are we headed with all of this? No one knows except that it cannot continue. There are a couple of important events to keep in mind: The Medicare Trust Fund is projected to run out of money in 2031 and the Social Security Trust Fund is projected to run out of money in 2034. On the latter of the two, it would be surprising if that date does not move up some because of the higher cost of living adjustments caused by inflation. In fact, that will probably affect both. Congress will be forced to do something; it will have no choice.

We need massive policy reform. We need to modify the programs that are causing most of the spending problems, and those are Social Security and Medicare. We need to scrutinize every expense category to see where we can save money or do things differently to save money. We probably need to increase taxes to offset some of the increased spending, and it won’t just be taxing the rich; this problem is too big not to hit all Americans. This country has been mismanaged for too long on the fiscal side. It is a bipartisan problem; both parties have contributed to it.

This article originally appeared on Springfield News-Leader: U.S. needs massive policy reform to lower national budget deficit