S&Ps Sets Expectations for Deficit ReductionJuly 29th, 2011 by Lee Eldridge
John Chambers, the chairman of Standard & Poor’s sovereign ratings committee, spoke yesterday about a potential downgrade of our country’s credit rating. The quote that will get the most coverage was when he said that a deficit reduction plan that promises $4 trillion in savings over time would be a “good down payment” on getting the country’s strained public finances under control.
The media coverage will likely focus on the debt ceiling debate and remind us that President Obama pushed for a $4 trillion package of cuts and revenues. But to do so would be to miss the larger picture painted by Chambers. Here’s the exchange that proceeded his quote about the $4 trillion being a “good down payment”.
Q: “There’s been a figure of $4 trillion dollars circulating as an example of the scope of fiscal consolidation measures that could work to stabilize the U.S. debt-gdp ratios. Could you explain how that figure was arrived at since it was mentioned in S&P’s reports and where it figures in S&P analysis?”
A: “First of all, that figure comes initially from the Bowles-Simpson fiscal commission, and it was embraced by President Obama in his April 13 speech and Paul Ryan in his counter-budget proposal. And so you had policy makers converging around the amount. Now actually the $4 trillion, depending on whether it is front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to GDP ratios. But it takes you pretty far along. And I think a grand bargain of that nature would signal, you know, the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP. The IMF says it takes 7.5% of GDP consolidation. I think we have more than that.”
Then Chambers added, “But $4 trillion would be a good down payment. We thought that..if policy makers could deliver the goods on that, then that would be a strong sign on our political scores and eventually on our projections on the fiscal side.”
So if $4 trillion is only a good start, then what is actually a good plan? Something closer to $8 trillion if you read between the lines. The Paul Ryan budget, which was vilified by many on the left as “draconian”, isn’t even this big.
How Did We Get Here?
When you listen to the talking heads criticizing the President, the Democrats, and the Republicans, remember this: If Congress had passed a serious budget and a long-term plan to tackle our deficits this spring along the lines of either the Bowles-Simpson recommendations OR the Paul Ryan proposal, we would not be facing this debt ceiling crisis or a potential downgrade of our country’s credit rating. The real blame? Democrats in the Senate have not created a budget proposal in more than 800 days. While they voted down the Ryan budget 40-57, they never countered with one of their own. You feel like blaming somebody? Blame the Senate.
Hard to say. It appears more and more likely that our credit rating will be lowered even when we raise the debt ceiling. The credit agencies want to see something serious. Would John Boehner’s new plan be considered serious? If you add in the second stage of the plan, he’s calling for about $2.7 trillion in cuts to spending. What about Harry Reid’s plan that only cuts spending by about $2.2 trillion (according to the CBO) over ten years? These could barely be considered a “down payment”.
I’ve said it before, and I’ll say it again. The only path towards fiscal stability includes overhauling our tax code, entitlement reform (social security, Medicare and Medicaid), regulation reform, cuts in spending including defense, the repeal of Obamacare, and hopefully a balanced budget amendment. You can’t reach $8 trillion in deficit reduction without tackling all of these problems.