SACHA PFEIFFER, HOST:
One of the nation's big credit watchdogs is raising a red flag about the government's debt. Today, the Fitch bond rating agency downgraded the federal government's AAA credit rating. It lowered it by one notch. Fitch cited growing federal deficits and a, quote, "steady deterioration in governance over the last two decades." The move comes two months after Washington narrowly avoided a potentially disastrous default on the federal debt. NPR's Scott Horsley is with us to talk about this. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Sasha.
PFEIFFER: Tell us more about why Fitch is making this move.
HORSLEY: The federal government is still running really big deficits. Of course, that wasn't surprising during the pandemic, but the red ink has continued to flow. The deficit nearly tripled in the first nine months of this fiscal year. And what's more, Fitch says the government has no real plan for fixing the situation. You know, the spending limits adopted as part of that recent debt limit deal barely scratched the surface. They addressed only a small fraction of the overall budget, and they don't deal with the longer-term challenges such as financing Social Security and Medicare for an aging population.
Fitch also pointed to a pretty toxic political environment that has seen repeated brinkmanship over the simple question of whether the government's going to pay its bills. Of course, it's coincidence that this announcement comes on the same day that the former president is indicted for allegedly trying to undermine the peaceful transfer of power. But given the extreme polarization and paralysis we see in Washington these days, it's no wonder some folks are thinking twice about whether the government can be trusted to pay its debts.
PFEIFFER: What is the Biden administration saying about the downgrade?
HORSLEY: Treasury Secretary Janet Yellen issued a statement saying she strongly disagrees with Fitch's move. Yellen called it arbitrary and said it's based on outdated information. She notes the U.S. economy has recovered from the pandemic more quickly than most other countries around the world, and, you know, unemployment's near a 50-year low. Inflation's come down. GDP is actually growing faster than a lot of forecasters expected. All that is true, but Fitch is not really commenting here about the strength of the U.S. economy. The bond rating agency agrees that the economy is vibrant and diversified and the envy of many other countries. What's concerning, Fitch says, is the policymaking here in Washington, and it points fingers at both parties. And it points to GOP tax cuts, spending by both Democrats and Republicans and a political refusal to grapple with the big, long-term challenges.
PFEIFFER: Scott, what are the practical consequences of this downgrade?
HORSLEY: Well, they may be pretty limited. As the Treasury secretary says, plenty of people are still willing to lend the U.S. government money, even if they are demanding higher interest payments in return. After the last big debt limit showdown in 2011, another bond rating agency, S&P, also downgraded the U.S. AAA rating. That did cause some short-term turmoil in the stock market, but it didn't really impede the government's ability to borrow money. The cost of all that borrowing is going up, though, leaving less money for everything else the government wants to spend money on. You know, interest payments between October and June totaled $652 billion. That's more than we spent on the military in that period, and it's 25% more than we spent in the same period a year ago.
PFEIFFER: And what would it take to restore the government's top-notch bond rating?
HORSLEY: Fitch says it would consider raising the bond rating again if the federal government were to grapple seriously with some of its longer-term fiscal challenges. That might mean adjusting outlays for Social Security and Medicare or raising taxes to pay for those programs or some combination of the two. Fitch also says, we'd like to see a turnaround in the toxic governing environment. That was all echoed by Maya MacGuineas, head of the committee for responsible federal budget. She said this ought to be a wakeup call and argues we need to do better.
PFEIFFER: That is NPR's Scott Horsley. Scott, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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