In a span of less than two months, the U.S. Congress passed substantial tax-reduction legislation and agreed to a major increase in federal spending. Estimates are that the U.S. Treasury will at least double its debt sales this year to more than $1 trillion to make up for the lost revenue from the tax cuts and pay for this extra spending.
How long can the U.S. go on this borrowing binge before it matters to the credit-ratings firms and global investors? And does it matter at all?
The two-year budget deal passed early Friday authorizes an additional $300 billion in spending for defense and non-defense programs over the next two fiscal years. Bloomberg News reports that the nonpartisan Committee for a Responsible Federal Budget, analyzing a report from the Congressional Budget Office, said the deal would add a net $320 billion to deficits over a decade, or $418 billion counting the additional interest costs. That’s in addition to the estimated $1 trillion added to the deficit over a decade by the Republican tax-cut legislation passed in December.
Even before the tax cuts and spending bill, the CBO estimated a budget deficit for fiscal 2018 of $563 billion and a shortfall of $689 billion in fiscal 2019. The projected revenue loss from the tax cut alone is about $100 billion in fiscal 2018 and $250 billion in 2019.
S&P Global Ratings, which cut the U.S.’s AAA credit rating in August 2011 to AA+, had this to say in June 2017:
Disagreement across and within political parties has resulted, in our view, in slower decision-making and has limited the government’s ability to enact forward-looking legislation. These factors, along with the government’s high level of debt, constrain the ratings. Some of the Administration’s policy proposals appear at odds with policies of the traditional Republican leadership and historical base. That, coupled with lack of cohesion, not just across, but within parties, complicates the ability to effectively and proactively advance legislation in Congress, particularly on fiscal policy. Taken together, we don’t expect a meaningful expansion or reduction of the fiscal deficit over the forecast period.
S&P has yet to weigh in on the tax cuts and spending deal, but Moody’s Investors Service said Friday that the U.S. stable credit profile is likely to face downward pressure in the long term due to meaningful fiscal deterioration amid increasing levels of national debt and a widening federal budget deficit. Moody’s gives the U.S. a rating of Aaa.