John Ransom

In the opaque world of sovereign debt credit ratings, one of the most important issues facing a rating agency is a country’s economic growth.

One of the reasons why the United States has had such large deficits is because economic growth for the last decade and a half has been anemic. 

I highlight that here because recently I took umbrage with the Congressional Budget Office projections on the U.S. economy and the country’s budget deficit, writing for Townhall about the budget problems we will face once interest rates begin to rise.

The “thorny problem with the CBO forecast is that after this year the report is contingent upon the economy growing at its maximum sustainable level. The CBO pegs GDP growth as modest this year – again -- but bets the farm that GDP growth will hit ‘3.4 percent in 2014 and an average of 3.6 percent a year from 2015 through 2018.’”

This is important because rating agencies know that the growth rate of a country’s GDP, in large measure, determines the amount the government collects in taxes. The amount they collect in taxes, minus what they spend, equals the deficit. 

And rating agency Moody’s has also now raised questions about the CBO forecast for both GDP growth and the deficit for at least the years 2014-18, according to MNI news.

Here’s a lengthy, but mostly relevant part, of MNI’s analysis. 

“In the end, what will be decisive is whether overall measures taken by the U.S. government will bring back the debt trajectory on a sustainable path, and on that front, economic projections matter, with rating agencies often referring to the Congressional Budget Office. Moody's noted Tuesday that the CBO's projections rely on "strong growth rates" for the real GDP over 2014-2018. Those forecasts are, at least for 2015, also higher than the private-sector consensus and than the top of the Federal Reserve's range, the report continued.

"If these high rates of growth do not materialize, the modest reduction in the debt ratios in the middle of the decade will not occur, and the rising trend will be more pronounced in later years," the report warned.


John Ransom

John Ransom is the Finance Editor for Townhall Finance.