The decision comes as legislation was signed into law in June, suspending the US debt ceiling until January 1, 2025, thus averting the spectre of default. "In Fitch's view, governance standards have steadily deteriorated over the past 20 years, particularly in tax and debt matters, despite the bipartisan agreement reached in June," the agency said in a statement.
 
US Treasury Secretary Janet Yellen said she disapproved of Fitch's decision, calling it "arbitrary and based on outdated data". The rating agency had announced in May that it had placed the USA's "AAA" rating under review due to the stalled negotiations over the debt ceiling. Moody's is the last major agency to maintain its "triple A" rating for US debt. S&P downgraded it to "AA+" back in 2011.
 
Sovereign credit ratings are used to determine a scale of risk for a nation. In particular, it determines the cost of financing its debt.
 
Erosion of governance
Fitch cites a deterioration in political leeway, illustrated by repeated deadlocks on the debt limit and last-minute resolutions. In addition, the US government lacks a medium-term fiscal framework, unlike most of its peers, and its budget process is complex. These factors, along with several economic shocks, tax cuts and new spending initiatives, have contributed to successive increases in debt over the past decade.
 
Fitch forecasts that the general government deficit will increase to 6.3% of GDP in 2023, up from 3.7% in 2022, due to cyclically lower federal revenues, new spending initiatives and a higher interest burden. In addition, state and local governments are expected to post an overall deficit of 0.6% of GDP this year, after a small surplus of 0.2% of GDP in 2022. Fitch expects no further substantial fiscal consolidation measures before the November 2024 elections.
 
Unfavorable economic conditions in the medium term
General government debt is set to rise: lower deficits and strong nominal GDP growth have reduced the debt-to-GDP ratio over the past two years since the pandemic peak of 122.3% in 2020; however, at 112.9% this year, it is still well above the 2019 pre-pandemic level of 100.1%. The general government debt-to-GDP ratio is expected to rise over the forecast period, reaching 118.4% by 2025. Medium-term fiscal challenges remain unresolved: over the next decade, higher interest rates and growing debt will increase the burden of debt servicing, while an aging population and rising healthcare costs will increase spending on the elderly in the absence of fiscal policy reforms.