HomeBudget & Tax NewsU.S. Credit Rating Drop: Spending Is the Reason (Commentary)

U.S. Credit Rating Drop: Spending Is the Reason (Commentary)

U.S. Credit Rating Drop: spending is the reason the federal government lost its triple-A rating from Fitch. (Commentary)

Fitch Ratings downgraded the U.S. credit rating from AAA to AA+ because they expect fiscal deterioration over the next few years. While the diagnosis seems delayed, they’re right. Irresponsible bipartisan  spending for decades is the culprit. With the national debt approaching $33 trillion, the American economy appears unlikely to recover its AAA status any time soon.

Republicans and Democrats have consistently increased spending more than tax revenues, leading to massive debt and unsustainable deficits.

Increased spending under President Biden made a dire situation even worse. For instance, in just five weeks since suspending the debt ceiling, the deficit rose by $1 trillionInflation soared once the current administration took office, and still hasn’t leveled off. Real wages are just now catching up with inflation after falling behind for more than two consecutive years. The US dollar’s value has waned.

America is not a safe investment, thus the downgrade.

U.S. Credit Rating Drop

Fitch Ratings predicts slower economic growth in the coming years due to high regulations, increased taxes, and demographic changes affecting productivity and population. This slower growth means less tax revenue for the federal government. Also, mandatory spending on Social Security and Medicare, which make up the bulk of federal spending, is projected to grow rapidly, contributing to rising deficits that will soon have just net interest payments exceed spending on national defense.

Americans can expect their wallets to be tangibly affected soon.

The downgrade will contribute to even higher interest rates than otherwise, which will have a domino effect on various aspects of the economy, including the stock market. Unless severe corrective measures are taken, the situation will likely deteriorate further, impacting people’s prosperity and perpetuating a debt and stagflationary situation.

Fiscal Responsibility

The government should focus on fiscal responsibility and better budget management to avoid a deepening spending crisis, exacerbating Americans’ existing economic burden.

First, an approach of zero-based, performance-based budgeting should be implemented throughout the government to identify and eliminate ineffective programs.

Second, independent audits by private entities of government spending for programs would provide transparency and guide decision-making regarding which programs to retain, modify, or cut.

Third, but likely most important, implementing a fiscal rule that has worked at the state level, such as population growth plus inflation for a maximum budget growth rate, could cap the government’s debt accumulation and support more economic growth. Had such a rule been adopted over the last two decades, the national debt increase would have been significantly lower, by just $500 billion instead of the actual $19 trillion, allowing for better debt management.

The US credit downgrade should be a sobering wake-up call that urges Congress and the administration to prioritize fiscal responsibility.

As the nation faces economic challenges and increasing debt burdens, it is crucial to adopt prudent measures to put America back on a path to prosperity. Only through concerted efforts to control spending, implement effective budgeting practices, and consider the long-term economic impact of policy decisions can America chart a sustainable and prosperous course for the future.

Otherwise, buckle up. It’s going to be a bumpy ride.

Originally published by the American Institute for Economic Research. Republished with permission under a Creative Commons Attribution 4.0 International License.

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Vance Ginn
Vance Ginn
Vance Ginn, Ph.D., is founder and president of Ginn Economic Consulting, LLC. He is chief economist at Pelican Institute for Public Policy and senior fellow at Young Americans for Liberty. He previously served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20.


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