S&P cuts U.S. outlook to negative on fiscal worry | ReutersStandard & Poor's on Monday downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.
The S&P said the move signals there's at least a one-in-three likelihood that it could lower its long-term rating on the United States within two years.
IMO, this decision, with which I agree, makes it even more important that a credible fiscal consolidation path be tied to the forthcoming increase in the debt ceiling. To get there, Republicans will need to compromise on taxes and Democrats will need to compromise on entitlement reform. In its April 2011 Fiscal Monitor, the IMF stated:
Especially in advanced economies, substantial further adjustment will be required over the remainder of the decade to eventually restore debt ratios to prudent levels. The challenge is even greater when the impact of trends affecting entitlement spending is taken into account. Indeed, rising spending on health care is the main risk to fiscal sustainability, with an impact on long-run debt ratios that, absent reforms, will dwarf the financial crisis.
To put things into perspective, the required adjustment between 2010-2020 is projected by the IMF to amount to 11.3% of GDP in the U.S. Only Japan (13.3% of GDP) and Ireland (12.4% of GDP) face larger fiscal adjustment. Greece is at 10.5% of GDP. For the 2010-2030 timeframe, the projected U.S. adjustment is 17.5% of GDP. No country faces a greater 20-year adjustment.