Fitch: US Budget Deal Signals Improved Policymaking Environment

The US bipartisan budget proposal announced on Tuesday signals an improvement in the functioning of budget policymaking, Fitch Ratings says. It suggests a lower risk of further political brinkmanship around budget policy precipitating another government shutdown or debt ceiling crisis, which would damage the US economy and perceptions of US sovereign creditworthiness.

But the proposal does not increase the federal government debt ceiling, which Congress will need to raise again by 7 February to give the Treasury the borrowing capacity it needs to meet its payment obligations and avoid further recourse to extraordinary measures.

The fiscal scope of the two-year proposal agreed between Senate Budget Committee chairman Patty Murray and House Budget Committee chairman Paul Ryan is modest. The estimated reduction in the budget deficit of USD20bn-23bn over 10 years is only 0.1% of GDP.

The proposal, announced ahead of Friday’s self-imposed deadline, has yet to pass Congress. If it is passed the appropriations committees would then need to agree spending bills by 15 January to prevent another potential government shutdown.

Nevertheless, a bipartisan agreement in the Congress Budget Committee suggests that the bouts of political disagreement that have destabilised US budget policymaking may become less frequent and intense. It even suggests some potential political capacity for a more substantive, longer-term agreement on revenue and expenditure reforms that could help reduce the US government’s debt/GDP ratio over the medium to long term.

As part of the reported agreement, the indiscriminate expenditure sequester would be loosened by USD63bn over two years and replaced by revenue increases and more targeted expenditure cuts worth an estimated USD85bn.

As we have previously stated, we expect to resolve the Rating Watch Negative on the US ’AAA’ sovereign rating by end-1Q14 after conducting a review, although timing will reflect the resolution of the FY14 budget discussions and further debt ceiling developments. The review will focus on projections for US public finances and our assessment of the impact of the debt ceiling crisis on US creditworthiness.