Tax Package Negative for U.S. Credit, Threatens Aaa Rating

by: Research Recap

Mood’s says the tax and unemployment benefits package agreed between President and Obama and Republican leaders should boost economic growth but raises the risk of a downgrade of the US Aaa credit rating in the next two years.

Excerpts from US Tax Package Is Negative for US Credit, but Positive for Economic Growth

If the tax and unemployment-benefit package agreed to on 6 December by President Obama and congressional Republican leaders becomes law, it will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level. From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth.

Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years.

The net cost of the proposed package of tax-cut extensions, payroll-tax reductions, unemployment benefits, and some other measures may be $700-$900 billion, raising the debt ratio to 72%-73%, depending on the effects on nominal economic growth. The government’s ratio of debt to revenue, instead of declining rather steeply over the two years from about 420% at the end of fiscal year 2010, would decline considerably less to somewhere just under 400%. This is a very high ratio compared with both history and other highly rated sovereigns.

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