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S&P's US Downgrade Assumes Renewal Of Bush Tax Cuts

by Leroy Baker,, Washington

10 August 2011

The rationale employed by Standard and Poor’s (S&P), in its downgrade of the United States AAA sovereign risk rating to AA+, involved the reduced chance of future tax revenue increases, epitomized by political opposition to the removal of the Bush tax cuts.

The downgrade, it was said, reflected S&P’s view, changed since its last review in April this year, that “the difficulties in bridging the gulf between the political parties over fiscal policy makes us pessimistic about the capacity of Congress and the Administration to be able to leverage (the debt limit) agreement into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon”.

S&P considered that the controversy seen to date in making progress in fiscal consolidation shows “that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process.”

“Despite this year's wide-ranging debate,” it added, “in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation programme that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures.”

In particular, S&P pointed out that, “compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 (Bush) tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues.”

Finally, the rating agency also placed a negative outlook on the US long-term rating. It indicated that, only if “the recommendations of the Congressional Joint Select Committee on Deficit Reduction - independently or coupled with other initiatives, such as the lapsing of the (Bush) tax cuts for high earners - lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+.”

TAGS: tax | economics | fiscal policy | United States | individual income tax

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