by | ARTICLES, ECONOMY, TAXES
Tom Palmer, a senior fellow at the Cato Institute, penned the following piece over at Policymic. Tom rightly gets to the heart of the matter in his summation at the end of the essay.
“Government debts and printing-press money will harm future generations. It’s unfair. It’s immoral. And it’s going to be solved not by occupying Phoenix, or Wall Street, or Atlanta, but by demanding that spendthrift politicians stop the bailouts and the cronyism, put the brakes on spending, and pay attention to a truly radical concept: arithmetic. Those are sound Tea Party values.”
Should Americans Support the Tea Party or Occupy Wall Street?
by | ARTICLES, ECONOMY, GOVERNMENT, HYPOCRISY, TAXES
I’ve seen very few fact checks pertaining to Obama’s record and/or speeches. USA Today did a nice little round-up of some recent claims by Obama regarding the jobs bill, taxes, etc. I’ve reproduced it below in it’s entirety because it was simple and straightforward.
AP fact check: Obama claims miss some evidence
By Jim Kuhnhenn, The Associated Press
WASHINGTON – In challenging Republicans to get behind his jobs bill Thursday, President Obama argued Republicans have supported his proposals before, demanded that they explain themselves if they oppose him, and challenged others to come up with a plan of their own. The rhetoric in the president’s quick-moving press conference dodged some facts and left some evidence in the dust.
Obama: “If it turns out that there are Republicans who are opposed to this bill, they need to explain to me, but more importantly to their constituencies and the American people, why they’re opposed, and what would they do.”
The facts: While Republicans might not be campaigning on their opposition to Obama’s plan, they’ve hardly kept their objections a secret.
In a memorandum to House Republicans Sept. 16, House Speaker John Boehner and members of the GOPleadership said they could find common ground with Obama on the extension of certain business tax breaks, waiving a payment withholding provision for federal contractors, incentives for hiring veterans, and job training measures in connection with unemployment insurance.
They objected to new spending on public works programs, suggesting instead that Congress and the president work out those priorities in a highway spending bill. And they raised concerns about Obama’s payroll tax cuts for workers and small businesses, arguing that the benefits of a one-year tax cut would be short-lived. The memo also pointed out that reducing payroll taxes, which pay for Social Security, temporarily forces Social Security to tap the government’s general fund. And it opposed additional spending to prevent layoffs of teachers, police officers and other public workers.
Obama: “Every idea that we’ve put forward are ones that traditionally have been supported by Democrats and Republicans alike.”
The facts: Obama proposes to pay for his jobs bill by raising taxes, something traditionally opposed by Republicans and, in the form Obama proposed it, even some Democrats. Senate Democrats were so allergic to Obama’s approach, which relied largely on limiting deductions that can be taken by individuals making over $200,000 a year and couples making more than $250,000, that they’re eliminating it and replacing it with a new tax on millionaires.
In claiming bipartisan support for the components of his proposal, the president appears to be referring just to what the plan would do, not how it’s paid for, but that’s a crucial distinction he doesn’t make.
Some of tax-cutting proposals offered by Obama have received significant Republican support in the past. But some of the new spending he proposes has received only nominal Republican backing. Evidence of bipartisanship provided by the White Houseincludes legislation last year that provided $10 billion to prevent teacher layoffs. It won the support of only two Republican senators —Olympia Snowe and Susan Collins, both of Maine and among the most moderate Republicans in Congress. Another example cited by the White House was proposal last year to offer tax breaks to businesses that hire new workers — it passed the House 217-201 with six Republican votes.
Obama: “The answer we’re getting right now is: Well, we’re going to roll back all these Obama regulations. … Does anybody really think that that is going to create jobs right now and meet the challenges of a global economy?”
The facts: Well, yes, some think it will. The U.S. Chamber of Commerce last month submitted a jobs proposal to Obama that included a call to ease regulations on businesses. It specifically called for streamlining environmental reviews on major construction projects and to delay the issuance of some potentially burdensome regulations until the economy and employment have improved. In the letter, Chamber President Thomas Donohue also called on Congress to pass legislation that would require congressional approval of major regulations. The chamber did not indicate how many jobs such regulatory changes could create, but it said: “Immediate regulatory relief is required in order to begin moving $1 trillion-$2 trillion in accumulated private capital off of the sidelines and into business expansion.”
Obama: “We can either keep taxes exactly as they are for millionaires and billionaires, with loopholes that lead them to have lower tax rates, in some cases, than plumbers and teachers, or we can put teachers and construction workers and veterans back on the job.”
The facts: True, “in some cases” wealthy people can exploit loopholes to make their tax rate lower than for people of middle or low income. In recent rhetoric, Obama had suggested it was commonplace for rich people to pay lower rates than others, a claim not supported by IRS statistics. But on Thursday, Obama accurately stated that it only happens sometimes.
In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the IRS. Yet that was less than 1 percent of returns with incomes above $1 million. On average, taxpayers who made $1 million or more paid 24.4 percent of their income in federal income taxes; those making $100,000 to $125,000 paid 9.9 percent; those making $50,000 to $60,000 paid 6.3 percent. The White House argues that when payroll taxes — paid only on the first $106,800 of wages — are factored in, more middle class workers wind up with a higher tax rate than millionaires.
by | ECONOMY
It seems like the administration and media these days are spending a lot of their energy complaining about the growing disparity between the haves- and have-nots. Many explanations are bandied about in an attempt to show that “devious policies” are causing the wide gulf between higher and lower income earners. These devious policies include special benefits for the wealthy, corporate welfare, and a tax system that favors those with higher incomes. But there are no special benefits for the wealthy; corporate welfare, though it exists only affects those few crony capitalist type industries and companies; and the tax system clearly favors those with lower incomes, not higher. Then why this imbalance?
The simple reason is that unlike people in the fastest growing countries, and unlike our own citizens in prior generations, the current middle and lower income lower classes have lost their inclination to invest in the future. I would argue that this is because the growing government welfare system is stripping individuals of their need to prepare and plan ahead. For the most part it is the upper middle and higher income individuals — those who are not the beneficiaries of government welfare and those with more entrepreneurial orientation — that are forcing themselves to save and put this money at risk into investments for their future.
China’s current economic success can be directly attributed to the financial attitude of their citizens with regard to investing. Almost all earners, even the middle and lower income ones, keep a certain amount of income each month and invest it in both entrepreneurial endeavors and the existing equity markets. It is common for even the minimum wage earners to save 25% – 50% of their income! Large or small sum, they regard investment as a priority and a path to prosperity.
Contrast this to the present state of affairs in our country. We have not been saving– we have been borrowing. Citizens have mortgaged their future by consuming continuously, while investing nothing. We are turning into a country where people will begin to wonder why they should invest, if it’s just going to be taken away from them in the long run by those who do not.
In order to get the middle class back on track, we must focus our efforts and rhetoric on reminding ourselves that this country was built upon those who were willing to invest their time and money to become great. It is the true source of upward mobility – and those that do not do their fair share will be left behind by those who do. Investment is what made our country thrive and it is the only thing that will properly sustain our country’s financial future.
by | ECONOMY, GOVERNMENT, HYPOCRISY, TAXES
Class warfare has become a key component of Obama’s policies and re-election rhetoric. The components of such a tactic are easily recognized: 1) the political opponent will hurt those among us who are most vulnerable (elderly, poor, etc); 2) the political opponent does not care about the “middle class”; 3) the political opponent wants to benefit those most advantaged (the rich/elite). The third point of this strategy is the one that is most popular with Obama, as he continuously and intentionally rails against “millionaires and billionaires” in order to separate that particular population from mainstream America.
Besides the obvious baseness of such an argument coming from the President of the United States, it is critically important to note that he doesn’t actually ever define a millionaire or billionaire. The amount of true millionaires and billionaires are so few in number, that taxing them more – as Obama plans to do – will not help with any significant deficit reduction. His assertion is pure dishonest political speech because you cannot possibly create enough revenue from the millionaire/billionaire population even if you were to tax them at 100%. Our fiscal situation is so dire in this country that an increased tax on this group in any large or small amount solves nothing.
Unfortunately, none of this matters to Obama. He intentionally throws the labels around so that they conveniently fit whatever emotive language will coerce voters and supporters to rally behind his outrageous fiscal policies. It is classical class-warfare: antagonizing lower socio-economic groups against the “rich”.
Obama has stated his intent to raise the marginal rates on the top income earners, (aka the “rich”, “wealthy”, or “top 2%”). Yet according to the IRS, the threshold for this bracket is actually 200K for individual taxpayers or 250K for married couples. These incomes are certainly no where near millionaire or billionaire amounts.
Since there is a clear federal definition for a group of taxpayers whom Obama is targeting for tax increases, Obama really has no right to say millionaires and billionaires as a collective for the highest income earners. But he uses the generic terms anyway. By making it sound like one kind of people, it pits the average/middle-class against “the other guy”. And if he actually tried to define that other guy instead of resorting to generic terms, it would include a lot of people who would be upset to be included.
History shows us that higher tax rates results in less – not more – tax collections. Democrats like to wax poetic about the high rates of 70% and even 91%. What they fail to comprehend or deliberately don’t explain is that at those times, there were an enormous amount of tax shelters such as real estate, so that people could legally lower that taxable income and would not have to actually pay the outrageous tax rates.
With the IRC reforms of 1986, Reagan reduced the tax rates to 28% in exchange for getting rid of the tax shelters. As a result, the amount of federal income collected was more at 28% and a clean tax code than at 91% and tax shelters, because at 28%, it really wasn’t worth the time, cost, and effort to hide money. If the tax rates are going to rise again – in addition to state and local tax hikes – the tax burden in this country will be staggering. People will do one of two things: 1) start finding ways not to pay it like they did when the rates were outrageous or 2) stop working and investing so much because it’s just going to get taken away from them. When that happens, it’s not good for the economy.
Blindly going after “millionaires and billionaires” (who earn $200,000 or more) is simply a tactic Obama uses to pit classes against one another for political gain. Imposing higher taxes on that segment of the population most able to invest in and aid our recovery is true economic ignorance. Why take additional money from those taxpayers who have been able to create wealth and employment successfully and give it to the government and politicians who have proven their ability to mismanage and squander income?
by | ECONOMY
It didn’t take long for Obama to begin talk about eliminating tax cuts for the wealthy. In fact, this is shaping up to be a major theme of his reelection campaign. Thankfully for the Republicans, this position serves to highlight his continued economic incompetence.
As a practicing CPA for nearly forty years, the wealthy are my clients and they are assuredly the ones paying the most taxes. The people in the highest tax bracket fall into three categories 1) Small business owners (200-2000 employees); 2) Executives working for a company; and 3) Wealthy individuals by inheritance or investment. Allowing the tax rate to rise affects each of these groups differently, but all impact the economy and its recovery greatly.
With the first group, most small business owners are arranged as an Scorp or LLC, which means they pay tax rates at the individual level, not business. Raising the rate to 39.6% raises the rate on these businesses. Most of the money made by these owners is reinvested in their company. They basically take out enough income on which to live and anything more gets put back into their business. So, if you increase their taxes, there is less money to reinvest in their company and back into the economy. This is important point because spending money as a means of recovery is much less effective and stimulative than investment.
Regarding the second group, most executives working for a company enjoy a large salary; however, much of that salary is fueled by stock options which make their taxes larger. Quite typically, the proceeds of that income is returned the company via more stock, which funnels growth, or cash is reinvested as needed. An increase in taxes will decrease their ability to best allocate their business returns.
Although the third group of individuals often have a lifestyle that is inherited, more money that is taxed out of that lifestyle means there is less to invest in appropriate economic endeavors – i.e. hedge funds, equities, and high risk funds. Those very investments are responsible for much of the entrepreneurship in this country. Taking away available capital via tax increases reduces innovation in the economy.
In a time of a recession unprecedented since the Great Depression, economic improvement is crucial. Inflicting tax increases on the segment of the population most able to invest in our economy and businesses will only slow our sluggish recovery. Trying to punish the taxpayers for the sake of campaign sound bites and political gain is both reprehensible and repugnant.
by | ECONOMY, NEW YORK
It may not be well known, but in New York, strikers – like the Verizon ones – are able to collect unemployment insurance while striking.It’s about time we expose the audacity of union employees collecting benefits during their time of voluntary unemployment. It is unconscionable that pro-union policies allow their members to deplete the state unemployment coffers into which hard working employers contribute for their employees. The present job environment is quite disparaging. With 9.2% unemployment and people desperate for work, unemployment insurance funds are already running at empty. That workers with jobs (like Verizon) are exhausting it further by claiming funds when they have elected to not work is despicable. Viewing this practice in tough economic times like these lets one see how truly outrageous it is. This policy must be reversed.
by | ARTICLES, ECONOMY, POLITICS
This past week, the Washington Post provided a sliver of clarity when
Glen Kessler, “The Fact Checker” , exposed Obama’s dubious tax cut claims. While he should be commended for issuing four pinocchios for Obama’s untruths, he completely missed the biggest lie of them all. What Obama (and Mr. Kessler) call tax cuts are not. As a lifelong CPA, I can assure you that tax cuts are a specific term, meaning cuts to the marginal tax rate. The package that Obama passed after he took office contained virtually none of those.
When the government gives out money, it is spending. Tax credits are government expenditures run through the tax system; your income collected is then given back to people on their taxes who meet a criteria. Simply having the IRS write the check (instead of a department such as Health and Human Services), allows the government to classify it a cut instead of spending. The “Making Work Pay Credit” cited in Kessler’s piece is a perfect example of what is not a tax cut – this is a government handout. Others include Cash for Clunkers , Energy Credits, and First Time Home Buyer Credits. Instead of doing the honorable thing and using the Treasury to send the money to each eligible taxpayer, the administration instead ran the disbursements through the IRS so they could claim a “tax cut”. This same type of deceit put Enron executives behind bars. Clearly there was nothing resembling a marginal rate tax cut that would be valuable to the economy .
This new jobs bill (that we haven’t seen yet) contains more of the same
tax cuts deceptive language,
fuzzy math, and worthless programs. Mr. Kessler’s assessment of Obama’s nonsense was a welcome contribution to economic debate, but the confusing rhetoric weakened his argument. The biggest whopper — Obama’s claim of tax cuts that aren’t– deserved a fifth Pinocchio.
by | ARTICLES, BUSINESS, ECONOMY, GOVERNMENT, TAXES
In an Op-Ed to the Washington Times last week (Stop Exporting American Jobs 8/23/11) Rep. Duncan Hunter assiduously notes that very little is being said about jobs moving overseas but he fails to point out the obvious reason why: our government policies are the driving force behind the mass exodus of businesses abroad. A staggering increase in regulations coupled with the the highest corporate tax rate among industrial nations form the foundation of a very anti-business climate in our current administration.
Hunter goes on to suggest that companies are being offered incentives to move overseas, but the reality is that as the government continues to meddle in business affairs, it creates more disincentives to stay here. High taxes, legislation such as Dodd-Frank, and entities such as the EPA, SEC and the NLRB contribute to the rising cost of doing business here. For many companies, moving abroad is a matter of corporate survival.
Mr. Hunter calls for putting American workers first instead of sending them away. For those legislators who insist that government is the solution – instead of recognizing that it is the problem – maybe it is time to send them away. If Congress, of which Hunter is an elected member, did its job putting American workers first by sticking to the Constitution and staying out of the free-market, perhaps our businesses would once again have the liberty to grow and thrive in our great nation.
by | ECONOMY, GOVERNMENT, NEW YORK, TAXES
The New York pension system is out of control. In addition to the extravagant, irresponsible and under-reported negotiated levels of benefits, there is an additional characteristic of the system that is never talked about. There is a huge break that goes to New York retirees; anyone who gets a retirement pension from New York State, or any locality or agency (teacher, firefighter, etc) pays no city or state income tax on that pension money. This hearkens back to the days when New York workers were so underpaid that this benefit was warranted.
It should be noted that nearly a decade ago, that provision of New York state law was declared federally unconstitutional. It was determined that New York state could not exclude federal retirees from the tax exemption The courts gave New York two options: make New York government pensions taxable, or add federal workers to the list of non-taxable agencies. Of course, New York chose the latter, thereby adding to the state budget deficits.
Even though historically, public sector employees earned less than what those skills would command in the private sector, that is clearly not the case today. Study after study has shown that public sector compensation – which includes retirement pensions – has steadily outpaced its private sector counterparts in recent years. New York is among the worst offenders.
This state of affairs must be reversed. Allowing the exempted retiree pensions to be taxed the same way other retiree pensions would accomplish two goals: 1) lessen the compensation disparity with private sector employees, and 2) severely reduce the New York budget deficit by providing additional revenue to the state.
by | ARTICLES, ECONOMY, POLITICS, TAXES
The S&P has downgraded our rating to AA+. Here is their press release, reprinted below in its entirety.
TORONTO (Standard & Poor’s) Aug. 5, 2011–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. Standard & Poor’s also said that the outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.
The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate 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. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, 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 program 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. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).
Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.
The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.
The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.
We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.
We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 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, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.
When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Standard & Poor’s transfer T&C assessment of the U.S. remains ‘AAA’. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers’ access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 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+’.
On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.
