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The U.S. is seven years away from a possible debt downgrade under President Obama's budget, based on Moody's standard for gauging the nation's creditworthiness.
The Congressional Budget Office's Friday analysis of the president's plan showed that by 2018, debt service would equal $725 billion, or 18.2% of the $4.0 trillion in projected federal revenue.
That would exceed the 18% threshold that Moody's has said would constrain policy options and would be inconsistent with a triple-A rating.
If an 18% interest-to-revenue ratio were hit due to a steady increase in debt, "the rating would certainly have to be reconsidered," Steven Hess, Moody's lead analyst for the U.S. rating, wrote in an e-mail. "But depending on an assessment of what was being done about the future level of debt, a downgrade would not be automatic."
Over the 10-year period, CBO projected that public debt would double over the coming decade to $20.8 trillion. Debt would reach 87.4% of gross domestic product at the end of fiscal 2021.
While discussions of sovereign creditworthiness generally focus on debt-to-GDP, Moody's prefers the interest-to-revenue ratio because it reflects on not just debt levels, but also borrowing costs and the sustainability of current tax and spending policy.
This framework could influence policy — particularly in a crisis.
Because debt levels and interest rates can't be lowered overnight, an obvious way of staying within the "AAA" limits set by Moody's would be to raise revenue — taxes.
Douglas Holtz-Eakin, president of the American Action Forum and a past CBO director, said the Moody's framework underscores the need to cut the deficit now.
"There is no reason why we should wait and find ourselves only with the option of raising taxes in 2018," Holtz-Eakin said.
Trigger In 2018, Or Sooner?
Last year's CBO analysis of the White House budget trajectory also signaled a 2018 downgrade trigger under Moody's standard. At the time, Moody's said the U.S. could face a downgrade as early as 2013 under more adverse scenarios — such as higher interest rates or slower growth.
Two aspects of CBO's projections suggest a possibility that the U.S. could cross into "AA" territory ahead of 2018.
Compared to last year, CBO significantly reduced its expectations for interest rates in the back half of this decade. But those lower rates are associated with CBO's baseline projections that assume much lower debt levels.
Other CBO work suggests that higher debt under the White House budget would yield negative feedbacks from the crowding out of public investment, such as higher rates and slower growth.
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