Both White House and GOP deficit plans put nation’s credit rating at risk

Deficit-reduction proposals from Speaker John Boehner (R-Ohio) and President Obama fall short of clearly stabilizing the debt, according to budget experts, putting the U.S. credit rating at risk of a downgrade. 

Under both proposals, U.S. debt would continue to grow as a percentage of gross domestic product, unless the economy grows at a rapid pace, according to experts who have studied the proposals. 

While some suggest new talks between Obama and Boehner suggest a deal is in reach, they have doubts it will be big enough to meaningfully reduce deficits — or satisfy credit rating agencies. 

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“More is going to have to be done. I’m actually getting a bit more optimistic that a fiscal-cliff deal will get done, but at the same time I’m less optimistic that a ‘grand bargain’ will be achieved,” Bob Bixby of the Concord Coalition said. “The real issue is where everything ends up as a percentage of GDP.”

Moody’s, Fitch and Standard and Poor’s have taken a cautious approach in public comments on talks between congressional Republicans and the White House. 

All three agencies declined to comment on the latest proposals from Obama and Boehner, but referred to earlier statements highlighting the need to stop the growth of U.S. debt. 

“If those negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable,” Moody’s said of the U.S. AAA rating in September.

“If those negotiations fail to produce a plan that includes such policies, we would expect to lower the rating, probably to Aa1.”

Moody’s and Fitch continue to give the U.S. a top AAA rating while S&P downgraded the U.S. credit rating to AA+ after the 2011 deal to raise the debt ceiling. Lower ratings tend to drive up U.S. borrowing costs and only add to the size of the debt.

Obama’s plan would reduce the debt from nearly 75 percent of GDP to 73 percent of GDP by 2022. Boehner’s offer gets the percentage to 72 percent, under the analysis of the independent Committee for a Responsible Federal Budget.  

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This would fall short of the 65.5 percent debt-to-GDP ratio achieved by Obama’s debt commission, led by former Sen. Alan Simpson (R-Wyo.) and former Clinton Chief of Staff Erskine Bowles. 

Neither plan reduces deficits enough to put the debt on a clear downward path in 2022, according to experts who say a debt-to-GDP ratio above 70 percent is generally considered in the danger zone for an eventual European-style debt crisis. 

The debt-to-GDP ratio was below 50 percent between the 1950s and 2007, highlighting the enormous growth in the debt over the last few years. With the retirement of the baby boomers after the next decade, the rate of debt decline needs to be downward, not merely flat-lining, by 2022, experts say. 

“Having something on a clear downward path provides much more confidence,” CRFB analyst Ed Lorenzen said. “Our best estimate would be they are right on the edge. It doesn’t leave much margin for error.”

One GOP aide noted that Medicare still goes bankrupt in the early part of the next decade under Obama’s and Boehner’s offers, while Social Security would stop paying full benefits the decade after.

Staff-level talks between Obama and Boehner resumed on Monday after a face-to-face meeting between the principals on Sunday. Both sides have refused to offer details on the talks. 

Without a deal, the Bush-era tax rates would expire at the end of the year and $1.1 trillion in indiscriminate deficit cuts known as sequestration would be triggered. Obama and Boehner are negotiating a deal that would prevent most of those tax hikes and spending cuts. 

Obama traveled to Michigan on Monday for a campaign-style event where he pressed Republicans to agree to raise tax rates on households with annual family income above $250,000. He said he would refuse to compromise on raising tax rates on the wealthy because it would force cuts to programs for other groups. 

Obama’s opening bid in negotiations included $1.6 trillion in new tax revenue, $600 billion in spending cuts and $435 billion in new spending and tax breaks to spur economic growth.

Boehner floated a framework of $800 billion in new tax revenues and up to $1.35 trillion in spending cuts.

The Congressional Budget Office would likely score a deal with $2.5 trillion in cuts and $500 billion in interest savings as stabilizing the debt, though it would also need to assume solid economic growth. 

Many observers believe Obama and Boehner will agree to a framework for a new round of negotiations on tax and entitlement reform that would lead to further reforms. That would kick further deficit reductions down the road and set up new fights over spending and raising the debt ceiling down the line. But even the result of these 2013 fights could fall short of the goal of stabilizing the debt, experts are warning. 

The smaller size of the deals on the table has conservative Republicans even more eager to keep the debt ceiling as a cudgel for future deficit reduction, GOP aides said.

Obama is demanding that the debt limit be raised as a part of the deal now being negotiated.   

— Amie Parnes contributed to this report.