Fitch Downgrades US Credit Rating Over Rising Debt, Eroding Political Stability

The week, Fitch Ratings downgraded the US government’s top credit rating to AA+ from AAA, citing an expected fiscal deterioration over the next three years, a growing general government debt burden, and eroding political stability. While a lower credit rating could raise borrowing costs for the US government, the downgrade is unlikely to damage the country’s creditworthiness or reputation.

Fitch also cited general economic uncertainty, medium-term challenges related to rising social security and Medicare costs, the Federal Reserve’s rate tightening cycle, and a potential recession as other contributors to the rating downgrade.

According to the Fitch analysis:

In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.

Despite the downgrade, Fitch cited several positives for US creditworthiness, including “its large, advanced, well-diversified, and high-income economy, supported by a dynamic business environment” and the US dollar’s status as the world’s reserve currency, “which gives the government extraordinary financing flexibility.”

Fitch also raised concerns over rising state and local budget deficits. “State and local governments are expected to run an overall deficit of 0.6 percent of GDP this year after running a small surplus of 0.2 percent of GDP in 2022,” according to the analysis.

As previously reported on Conduit Street, the Maryland Department of Legislative Services warns of looming structural deficits over the next four years, a stark change from last January, when DLS projected billions in structural surpluses between fiscal 2023 and fiscal 2028.

Rising costs, sluggish growth, unfunded mandates, and greater demand for services all signal turbulent times ahead for county budgets. Economic instability, shifting demographics, and funding the ambitious, multi-billion-dollar overhaul of Maryland’s education system exacerbate the ballooning pressure.

At the MACo Summer Conference session, “Buckle Up: Turbulent Times for County Budgets,” an expert panel will share best practices for planning, budgeting, and managing expectations and discuss strategies for how counties can best prepare for future fiscal uncertainties.

The 2023 MACo Summer Conference is August 16-19, 2023, at the Roland Powell Convention Center in Ocean City, Maryland.

Learn more about MACo’s Summer Conference: