It believes it is unlikely that these will be resolved expeditiously because of long-standing weaknesses in the federal government’s budgetary process and a narrow Republican House majority.
The US faces significant fiscal policy challenges this year relating to debt limit, appropriations and tax cuts in the context of already large deficits and an increasing debt burden, Fitch Ratings has cautioned.
It believes it is unlikely that these will be resolved quickly because of long-standing weaknesses in the federal government’s budgetary process and a narrow Republican House majority.
The latest debt limit suspension expired at the start of this year, and the Treasury estimates that the new limit of $36.1 trillion will become binding between January 14 and 23 this year.
December’s continuing resolution (CR) keeps the federal government funded until March 14. And the tax cuts enacted in 2017 are set to expire at end of the year.
Based on previous events, Fitch Ratings assumes that the debt limit will be increased, or suspended again, before the so-called x-date, when cash balances and ‘extraordinary measures’ used to meet financial obligations are exhausted.
It thinks the x-date will likely fall in the summer, perhaps as late as July or August, considering the Treasury’s cash balance ended 2024 at close to $722 billion and given its expectation that tax receipts will pick up significantly from last year, the rating agency said in a release.
However, it thinks it is unlikely that debate to increase or suspend the debt limit will be resolved early in 2025 given the significant disagreements on spending policies in Congress.
A pre-Christmas government shutdown was only averted at the last minute, after a contentious debate around president-elect Donald Trump’s insistence that funding be tied to a fresh suspension/increase of the debt limit, and disagreements over certain spending items.
Persistent policy disagreements, especially on spending matters, and the narrow Republican House majority led Fitch Ratings to doubt that all the required appropriations bills will be passed by March 14, requiring another CR to avoid a shutdown.
The policy assumptions underlying Fitch’s US fiscal deficit and debt projections reflect the weak fiscal framework and apparent lack of appetite across the political spectrum for a policy mix that would ensure durable and structural deficit reduction.
Fitch forecasts general government (GG) deficits to exceed 7.5 per cent of gross domestic product (GDP) in 2025 and 2026, notwithstanding resilient GDP growth and the associated cyclical personal and corporate revenue benefits, plus capital gains from strong stock markets in 2024, and additional tariff revenues.
Large fiscal deficits in line with these forecasts would push GG debt above 120 per cent of GDP in 2026, over twice the forecast ‘AA’ category median.
Fibre2Fashion News Desk (DS)
