America’s political dysfunction and rising debt could tarnish the country’s perfect AAA credit rating, Fitch Ratings said this week.
“The U.S. sovereign rating is supported by structural strengths that include the size of the economy, high per capita income and a dynamic business environment,” Fitch said in a credit rating update, but the country’s outlook is “negative” due to growing political and fiscal risks.
With respect to debt, Fitch said that while public finances have improved relative to previous forecasts thanks to a stronger-than-expected economic recovery and fiscal tightening as emergency aid programs wind down, interest rates could climb and/or deficits could increase, “potentially creating downside risk.”
In terms of politics, “governance is a weakness relative to the 'AAA' median,” Fitch said. “The failure of the former president to concede the election and the events surrounding the certification of the results of the presidential election in Congress in January, have no recent parallels in other very highly rated sovereigns. The redrafting of election laws in some states could weaken the political system, increasing divergence between votes cast and party representation. These developments underline an ongoing risk of lack of bipartisanship and difficulty in formulating policy and passing laws in Congress.”
Looking ahead: Fitch analysts expect Democrats to pass a spending package in the range of about $1 trillion over 10 years, well below the $3.5 trillion currently under discussion. Debt is expected to stabilize at about 121% of GDP in 2024, with “shallow” increases in the years following.