Politics

Counting Down to the Budgepocalypse

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In March, credit-rating agency Moody's warned that America's top-notch credit rating could be at risk. Thanks to the country's increasingly precarious fiscal situation, "their 'distance-to-downgrade' has in all cases substantially diminished."

But how close are we to losing our credit edge? IBD reports:

In the wake of the financial crisis and recession, Moody's Investors Service has brought new transparency to its sovereign ratings analysis—so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody's view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody's managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

The Congressional Budget Office has been sounding warning alarms for months now. Just a few weeks ago, CBO director Doug Elmendorf gave a presentation arguing that the country is on a "worrisome" fiscal path and that making changes of the necessary magnitude is an urgent task for policymakers. 

But as Robert Samuelson pointed out yesterday morning, we're edging toward the same welfare-state trap that's killing Greece. Yes, the details of Greece's fiscal calamity mean that their situation is not perfectly analogous to our. But the broad outlines of the problem Samuelson identifies are the same: Entitlements have been woven into the system in such a way that swift cuts risk stunting growth. Yet letting spending continue on its current track is plainly unsustainable, adds to our mountain of debt, and puts the nation's credit rating at further risk.   

And what's President Obama's response? A budget that fails to hit the administration's own deficit targets and a nearly powerless commission that arguably doesn't even address the true long-term problem. 

I noted the impending budgepocalypse here. Veronique de Rugy examined the president's overly rosy budget assumptions here.