Even if lawmakers raise the nation’s debt ceiling by the Tuesday deadline, many economists have predicted the United States will lose its sterling triple-A credit rating, damaging an already fragile economy and creating a major political liability for the White House. Administration officials are seeking to assure bond-rating agencies that the nation’s fiscal house remains in order as the Aug. 2 deadline to raise the $14.3 trillion debt ceiling approaches.
But credit agencies say they are looking for a deeper overhaul of the nation’s spending, something lacking in both Democratic and Republican proposals. Neither plan would reduce entitlement spending or raise new revenue.
“I think we are inevitably on the path to downgrade,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “It’s not just about the debt limit but a question about the sustainability of the fiscal situation.”
Obama argues his attempts to bring down the deficit have been hamstrung by $1 trillion in unfunded tax cuts, two wars and an unfunded prescription drug plan for seniors inherited from President George W. Bush.
But the deficit has been ballooning faster since the Obama administration began.
Though Bush added more than $5 trillion to the deficit during his eight-year term, Obama’s federal budget deficit is projected to hit a record $1.6 trillion this year alone. A $787 billion stimulus plan and the early costs of Obama’s $950 billion health care reform program have contributed to soaring deficits.
While downgrade is certainly preferable to default, a change in credit rating would likely increase interest rates for consumers and damage U.S. credibility with foreign investors.
Obama has repeatedly rejected a short-term debt ceiling increase, saying it would do little to sway credit rating agencies.
“For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” Obama said during his address to the nation Monday.
But the “$64,000 question,” said Darrell West, vice president and director of governance studies at the Brookings Institution, remains whether the public would blame the White House or congressional Republicans for the unprecedented downgrade.
“Republicans are seen as being less willing to compromise than the president,” he said. “Obama also pushed for a bigger deficit deal than [House Speaker John] Boehner and [Senate Minority Leader Mitch] McConnell so that may insulate from voter wrath on a debt downgrade.”
But others say any form of economic pain would become Obama’s liability and offer GOP presidential contenders another line of attack in their clearest path to the White House.
“Presidents bear most of the blame for that type of thing,” Calabria said. “If someone gets laid off, they don’t think back to the process that got them there. He’s the economic steward.”
Standard and Poor’s introduced the prospect of downgrade when it declared earlier this month that it wanted a debt deal that would cut roughly $4 trillion over the next decade.
None of the current proposals on Capitol Hill comes close to that benchmark.
A plan put forward by Senate Majority Leader Harry Reid, D-Nev., calls for a one-time increase in the debt limit through 2012 and $2.7 trillion in spending cuts, including $1 trillion in savings from drawing down the Iraq and Afghanistan wars. In comparison, Boehner is seeking $1.2 trillion in cuts over the next decade.
