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Moody’s: U.S. Fiscal Cliff Deal Has 'Limited' Positives

Moody’s Investors Service is out with a new report that again warns the fiscal cliff deal passed by both houses of Congress on January 1 does not deliver “a meaningful improvement” to the federal government’s debt trajectory “over even a longer time horizon.”

While it “will avert a recession,” Moody’s says the deal’s “direct effects on U.S. government  creditworthiness are only marginally positive.”

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The credit rating agency, which has the U.S. rating of Aaa on negative outlook, also says it believes the federal government will likely enact further tax hikes or spending cuts “that lower future budget deficits” in coming months, possibly in the debt ceiling deal.

Where does Moody’s say the federal government can raise revenues? On the lower brackets. It says that “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."

Moody’s notes that the Congressional Budget Office estimates that the fiscal package still adds “about $4 trillion over the coming decade, excluding higher interest costs on the resultant higher debt.” Government debt to GDP is expected to peak at about 80% in 2014 “and then remain in the upper 70% range through 2022.” Even at that level, the government would be “less able to deal with future pressures from entitlement spending or from unforeseen shocks,” the credit rating agency says. “Thus, further measures that bring about a downward debt trajectory will likely be needed to support the government’s creditworthiness.”

Moody’s also echoes other economists in saying “the increase in the Social Security payroll tax to 6.2% of income from 4.2%, which became effective on 1 January, will constrain growth in the coming quarters.”

Overall, Moody’s says while “the risk of default on Treasury bonds is extremely low,” it believes “the debt trajectory resulting from this process will determine whether the final result is positive or negative for the creditworthiness of the US government.”