Congress might have worked through the night and into the new year to avert falling off the fiscal cliff, but the legislation doesn’t do enough over the long term to improve the United State’s credit rating, according to Moody's Investors Service.
In a release Wednesday, Moody's said the fiscal package agreement helps clarify the medium-term deficit and debt trajectory of the federal government, but falls short of providing a basis for a meaningful improvement in the government's debt ratios over the medium term.
“Although the fiscal package raises some revenue through higher tax rates on individuals earning more than $400,000 ($450,000 for joint filers) and through some other smaller measures, the estimated amount of increased revenue over the next decade is far outweighed by the amount of revenue foregone through the extension of lower tax rates for those with incomes below $400,000, the indexation of the alternative minimum tax, and other measures,” the ratings firm said in a release.
The New York-based firm also stated that it expects more fiscal measures in the coming months, but the “lack of further deficit reduction measures could affect the rating negatively. Notably, yesterday's package does not address the federal government's statutory debt limit, which was reached on December 31. The need to raise the debt limit may affect the outcome of future budget negotiations.”
After weeks of gridlock and days of long-lasting negotiations, the House passed H.R. 8, American Taxpayer Relief Act of 2012 by a 257-167 vote late Tuesday night. The Senate passed the bill Monday, a few hours after the government hit its limit on federal borrowing.
The deal, which was brokered by Vice President Joe Biden and Senate Minority Leader Mitch McConnell, (R-Ky.), and sealed by Speaker of the House John Boehner, permanently extends the Bush income tax cuts for those making $400,000 or less, extends unemployment’s benefits for one year, and holds the estate tax threshold at $5 million. It only delays the massive spending cuts for another two months.
Moody’s said that further revenue measures and debt trajectory will determine whether the country’s credit rating returns to a stable outlook or downgraded to Aa1. A credit rating evaluates the credit worthiness of a debtor and is important to maintain since countries rely on foreign investors to purchase their debt.
Global and domestic financial markets rallied on the first trading day of the year on news lawmakers reached an agreement.
Also on Wednesday, the International Monetary Fund said the economic recovery would have derailed if the country went off the cliff.
“However, more remains to be done to put U.S. public finances back on a sustainable path without harming the still fragile recovery,” said Gerry Rice, director of external relations at the IMF in a statement. “Specifically, a comprehensive plan that ensures both higher revenues and containment of entitlement spending over the medium term should be approved as soon as possible. In addition, it is crucial to raise the debt ceiling expeditiously and remove remaining uncertainties about the spending sequester and expiring appropriation bills.”
Follow Kathryn on Twitter @kathrynvasel