US STIMULUS WILL BOOST GROWTH AT A COST OF HIGHER DEFICITS, DEBT

The $1.9 trillion American Rescue Plan (ARP) proposed by President Biden and passed by the US House and Senate will deliver a strong economic boost but the scale of the package points to a delayed return to a fiscal stance consistent with stabilization of the government debt ratio, says Fitch Ratings. Consequently, the prospect of debt stabilization is further away than when Fitch placed the US Sovereign Rating of ‘AAA’ on Negative Outlook in July 2020, despite a stronger economic recovery demonstrated by improving data and supported by the ARP.

The FY 2021 federal deficit is likely to reach 15% of GDP, equaling the FY 2020 deficit as a share of output. Last month, the Congressional Budget Office (CBO) projected a deficit of 10.3% of GDP in FY 2021, including pandemic relief spending of $900 billion passed at the end of December. Fitch had expected and largely factored this in at its July rating review. The CBO expects the Senate’s latest bill to add $1.1 trillion to spending in FY 2021 and $458 billion to FY 2022.

Direct relief to households in the form of a one-year extension of the child tax credit, extension of unemployment benefits and stimulus checks account for around half of the bill and more than half of the spending in FY 2021 and FY 2022 but other spending will take longer to disburse. Even assuming no other major spending, Fitch projects the federal deficit will approach 7% of GDP in FY 2022.

 

Source: Fitch Ratings