Standard & Poor’s downgraded the credit rating of U.S. government debt Friday, much to the chagrin of investors three days after both Moody’s Investors Service (NYSE:MCO) and Fitch Ratings reaffirmed their AAA credit ratings. But while the deal ending the debt-ceiling impasse was enough for Moody’s and Fitch, at least for the time being, S&P needed more.
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Standard & Poor’s (NYSE:MHP) wants what everyone wants: for the country to generate enough savings from its debt deal to stabilize the national debt so that it no longer continues to grow faster than the economy. Ideally, the U.S. should try to get the federal debt down to around 60% or 65% of GDP (historically it’s been around 40% of GDP), which would require at least $4 trillion to $5 trillion in savings over the next decade, twice what Tuesday’s debt deal plans to cut in that time. Congress needs to pass a plan generating these additional savings this year in order to prevent further downgrades.
A medium-term plan would have to drastically cut spending, but not place too heavy a burden on the next few years while the economy is still trying to recover. Rather than burden the economy, any multi-year plan should help recovery efforts, adding stability and transparency and reassuring markets.
A second batch of cuts would require lawmakers on both sides of party lines to make compromises, even on their most sacred cows. For Republicans, that means increasing tax revenue. For Democrats, that means more spending cuts to social programs, including Social Security, which could include raising the retirement age, changing cost-of-living adjustments, and re-apportioning benefits according to demonstrated need.
While increasing revenue and cutting spending will do a lot of the work toward reducing the deficit, and at least get us started on what could be a decades-long process of balancing the budget, putting a cap on spending still might be necessary to ensure that lawmakers follow through on their promises. The cap could be triggered if Congress fails to adequately cut spending, and could prevent new revenues from being included in the budget unless entitlement reforms are enacted. Thus the cap would act as sort of a stopgap preventing lawmakers from letting party politics get in the way of necessary steps toward our recovery.