Explained: What is a rating downgrade? And six key reasons why Fitch Ratings downgraded US
Fitch cuts US credit rating to AA+ from AAA after debt limit standoffs; White House “strongly disagrees" Fitch Ratings enlisted six key rating drivers in its statement. Take a look: Erosion of Governance: Fitch believes there has been a steady deterioration in standards of governance in the US over the last 20 years, including on fiscal and debt matters, in spite of the June bipartisan agreement to suspend the debt limit until January 2025.
"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch pointed out. Besides, the rating agency observed that the US government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.
"These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an ageing population," Fitch observed.
Rising General Government Deficits: Fitch expects the general government (GG) deficit to rise to 6.3 per cent of GDP in 2023, from 3.7 per cent in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Fitch forecasts a GG deficit of 6.6 per cent of GDP in 2024 and a further widening to 6.9 per cent of GDP in 2025.
"The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2 per cent of GDP in 2024-2025 (in line with the historical 20-year average). The interest-to-revenue ratio is expected to reach 10 per cent by 2025
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