Fitch Ratings, a credit reporting agency, recently issued a foreboding outlook on America’s credit health. For the first time in 12 years, the United States has been downgraded from the highest AAA rank to an AA+. The move was inspired by the rising indebtedness that the nation is shouldering: $32 trillion and rising.
Much of the Treasury Department’s enhanced rate of borrowing came as a result of COVID-19 mitigation, with a $6 trillion rise in spending since March 2020. Contributing to the downgrade was the recent political standoff over raising the debt ceiling and the resulting gridlock which nearly led to the first default in the nation’s history. Imbalances from excessive federal borrowing to tax cuts, rising national debt, and a complicated budget process all factored into Fitch’s projection of “fiscal deterioration over the next three years.”
As a leading provider of credit ratings, Fitch is well regarded by public and private sector actors. As the richest nation in the world, the U.S. has an international reputation to preserve when borrowing and lending. People everywhere pay close attention to the creditworthiness of the U.S. federal government. Similar to a credit card issuer affording close notice to decreases in an individual borrower’s credit score, institutional elites pay attention to declining rankings from Fitch.
A downgrade may severely impact the federal government’s ability to borrow from lenders. It may also imply a decline in America’s ability to manage its excessive spending habits in the face of mounting debt. This could send a signal of weakness before our global market rivals, notably China. For now, this new AA+ rating places the U.S. in the same league with countries like Austria and Finland, while falling just behind Switzerland and Germany.
Fitch’s downgrade should serve as a wake-up call for member of Congress. As George Santayana famously said, “those who do not learn from history are doomed to repeat it.”
Fitch’s recent rating is heavily reminiscent of S&P’s downgrade of 2011, which saw a similar clash over the debt ceiling. At that time, a deal was struck at the 11th hour to avert a major government shutdown. Fitch’s latest downgrade was issued during President Biden’s third year in office, and S&P’s downgrade transpired during Obama’s third year as well.
Both instances involved political actors who were bitterly divided on spending and occurred just before a major election year—2012 then and 2024 now. Each time was also fueled by backlash from a GOP-led House to the incumbent administration’s disregard for fiscal restraint in the face of overspending and accelerating debt.
We must avoid the mistakes of the past if we are to move forward with actually curbing the national debt. Fitch’s rating is likely to make it harder for government to implement its programs by driving up the cost to borrow money, while making bondholders more hesitant to satisfy pending requests from the Treasury.
In 2011, the federal government paid $1.3 billion more just to borrow money, according to the Government Accountability Office. There is little doubt that we will see a similar trend of higher costs for consumers and expensive government borrowing to come.
Lawmakers of both parties must use Fitch’s ranking as wake up call to restrain the government’s runaway spending, while preventing new debt crises in the future.