On August 1, Fitch Ratings made headlines by downgrading the credit rating of the United States government from AAA to AA+, citing “a steady deterioration in standards of governance.” In the world of finance, a credit rating downgrade is often met with alarm bells and market tremors. Such a downgrade not only reflects an assessment of an entity’s financial health but also serves as a stark reminder of the underlying issues that may have brought about the change.

This isn’t the first time the U.S. has encountered a credit rating downgrade. In 2011 a similar scenario occurred when S&P Global Ratings downgraded the nation’s credit rating (it remains AA+). The recent Fitch downgrade, though concerning, provides us with a unique opportunity to reflect on the systemic issues that plague our budget process and political environment.

The credit rating downgrade rests on several critical concerns. Firstly, our fiscal health has deteriorated significantly, with escalating budget deficits and mounting public debt raising red flags. We need a practical and sustainable fiscal policy. Secondly, the erosion of governance standards over the past two decades, driven by political polarization and recurring debt ceiling standoffs, has hindered effective fiscal policy implementation. Political gridlock has tangible repercussions, including economic instability.

Thirdly, neglecting structural issues like the sustainability of programs such as Social Security and Medicare, coupled with repeated tax cuts devoid of corresponding revenue boosts, has played a role in the downgrade. The inability to address structural issues exacerbates the problem. The unchecked growth of spending programs for older Americans, combined with repeated tax cuts, reflects a lack of political will to tackle the root causes of our fiscal challenges. So, this both undermines our long-term fiscal stability and compounds the concerns raised by credit rating agencies.

Finally, economic realities, including interest rates and economic growth, wield considerable influence over credit ratings. The strain of higher interest rates and sluggish economic growth on debt management Is part of this. For a long time, low interest rates allowed borrowing without undue strain on the budget. However, today’s interest rates have far-reaching consequences for housing, private investment, and overall economic stability. Rising interest rates and the potential impact on economic growth could further strain our ability to manage debt obligations.

The Congressional Budget Office (CBO) and Fitch Ratings share concerns regarding the trajectory of the US economy. The CBO released its most recent long-term budget outlook on June 28, projecting the federal budget and economy over 30 years under current laws, based on its 10-year baseline budget. This year’s projections, incorporating the Fiscal Responsibility Act of 2023 (which ended the debt-ceiling standoff until 2025), show deficits starting at 5.8% of GDP in 2023, dropping to 5.0% by 2027, then steadily increasing to 10.0% in 2053 due to higher spending growth outpacing revenues. Federal debt held by the public is predicted to rise from 98% of GDP in 2023 to 181% by 2053.

Let’s take a time-out and review how federal debt poses several problems for the economy: Firstly, it could lead to reduced national savings, impacting income levels and reducing available capital for investment. Secondly, the growth in debt results in higher interest payments, potentially necessitating more substantial tax increases and spending cuts to manage these obligations. Thirdly, an increasing debt burden could curtail the government’s flexibility addressing unforeseen challenges and capitalizing on prospects. Lastly, a substantial and expanding federal debt raises the specter of a fiscal crisis, potentially causing investor reluctance to fund government borrowing, thereby driving up interest rates to attract those investors and exacerbating economic instability.

In essence, both the CBO and Fitch Ratings caution that the growing federal debt in the United States poses serious risks to the economy, ranging from reduced savings and income to heightened fiscal crisis potential.

The threat is real. And it’s up to Washington to fix its broken budgetary process.