Committee for a Responsible Federal Budget

Moody's Warns U.S. over Tax Cut Deal

Dec 14, 2010 | Economics| Taxes

With the Senate getting past a procedural vote in approving the tax deal, it appears more and more likely that this deal will soon become law. With the 10-year deficit projections of this deal ($858 billion) totaling close to the 2009 stimulus ($814 billion), with Administration estimates saying it will create or save 2.2 million new jobs (which our math says is about $390,000 per job) it appears that this deal may be short-term gain, unless it is put in the context of a credible medium-term plan to get our fiscal house in order it will worsen our growth and employment prospects down the road.

Moody's recently announced that if this deal becomes law, it increases the chance that the ratings agency could downgrade United States debt from its current Aaa rating (the highest possible)--given that the tax cut package does not yet include any offsets. If that happens, the United States will pay higher interest rates on its debt, which will mean growth and employment will be lower than otherwise (read how CBO has warned before that extending the tax cuts would be bad for the economy down the road). As a result, while this bill will likely create jobs in the short-term, the law may actually decrease economic activity in the long-term since it is not tied to any deficit reduction package or agreement.

As the ratings agency said:

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth."

CRFB again calls for a deficit reduction plan to be included along with the tax cut compromise.