August 23, 2017 / 2:52 PM / a year ago

Fitch: Debt Limit, Government Funding to Test US Policy Makers

(The following statement was released by the rating agency) NEW YORK, August 23 (Fitch) US politicians face two deadlines in the coming weeks regarding government funding and the federal debt limit, which will demonstrate their capacity for coherent fiscal policymaking and cooperation, Fitch Ratings says. If the debt limit is not raised in a timely manner prior to the so-called "x date" Fitch would review the US sovereign rating, with potentially negative implications. We have previously said that prioritising debt service payments over other obligations if the limit is not raised - if legally and technically feasible - may not be compatible with 'AAA' status. Congress must also agree on spending levels for FY18 to prevent a government shutdown in October. The House has passed appropriations bills, which will form the basis for a joint budget resolution. A government shutdown would not have a direct impact on the US's 'AAA' rating, but it would highlight how political divisions pose challenges to the budgetary process. The federal debt limit was re-imposed in March and the Congressional Budget Office (CBO) estimates that the Treasury is likely to exhaust "extraordinary measures" (reaching the "x date") in October. Brinkmanship over the debt limit could ultimately have rating consequences, as failure to raise it would jeopardise the Treasury's ability to meet debt service and other obligations. The next Congressional session begins on 5 September, with only 12 congressional working days before month-end. We believe there is strong political will to ensure that Treasury securities are honoured in full and on time. Treasury Secretary Mnuchin and Senate Majority Leader McConnell both said on 21 August that the debt limit would be raised, with Mnuchin rejecting the idea of prioritisation. In Fitch's view, the economic impact of stopping other spending to prioritise debt repayment, and potential damage to investor confidence in the full faith and credit of the US, which enables its 'AAA' rating to tolerate such high public debt, would be negative for US sovereign creditworthiness. Republican fiscal conservatives are likely to make support for lifting the debt limit conditional on measures to aggressively reduce the budget deficit. A "clean" debt limit increase, unattached to other policy measures, appears possible, although it may require support from Democrats. Assuming the limit is raised or suspended, considerable uncertainty remains around the short-term fiscal and borrowing outlook. Bipartisan agreement on tax and spending changes that would reduce the deficit seems a distant prospect. And despite both Congress and the presidency being under Republican control, divisions within the party have stymied its and the president's legislative agendas, as seen in the failure to "repeal and replace" the Affordable Care Act. We continue to assume some loosening in fiscal policy led by tax cuts, but the likelihood has diminished since the start of 2017. Congressional leadership aims to pass tax reform via the reconciliation mechanism that allows for a simple Senate majority, but subject to the restriction that the changes cannot widen the deficit after 10 years. Scaling back tax deductions to cut tax rates will prove challenging. Divisions between centrist Republicans and fiscal hawks are evident over the House budget proposal to cut USD200 billion over 10 years from mandatory spending (largely on Medicare) and boost defence spending. The latest Republican house budget resolution restates the aim of eliminating the budget deficit over 10 years, partly through some mandatory spending cuts. But it lacks detail, and assumes a 2.6% growth rate, which we view as optimistic over the medium term (we forecast 2.6% growth next year, slowing to 2.2% in 2019). Appropriations bills passed by the House instruct lawmakers to find 1% of GDP in savings over 10 years and would limit spending growth to an average of 3% per year, below the 5% in the CBO baseline. Contact: Charles Seville Senior Director, Sovereigns +1 212 908 0277 Fitch Ratings, Inc. 33 Whitehall Street New York, NY James McCormack Managing Director, Sovereigns +44 203 530 1286 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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