The U.S. government’s debt dynamics have strengthened thanks to recent improvements in the economy and increased revenue, according to credit assessor Fitch Ratings, which has upgraded the country’s outlook to stable.
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The ranking company, which had previously assessed the outlook as negative, affirmed the nation’s credit rating at AAA, its top score.
“A stronger-than-expected economic recovery has led public finances to outperform Fitch’s expectations,” the company said, noting that it sees personal and corporate income taxes helping to boost overall revenue by around 19% in 2022. The company also pointed to a winding down of pandemic-related spending.
Andrew Harrer/Bloomberg
Other key points
- Fitch forecasts a general government deficit at 5% of GDP, down from an estimated 10.2% of gross domestic product in 2021; state and local governments continue to perform well, and that could result in an even lower general government outturn, it said.
- It expects the primary budget deficit to keep narrowing in 2023-2024, but a rising interest burden will keep the deficits at 5.2% of GDP.
- Fitch forecasts a decline in the general government debt ratio to 113% of GDP at the end of 2022 based on nominal GDP growth of 9.5%, from 118% in 2021; it sees the ratio starting to rise again at a gradual pace in 2024.
- Current debt levels are over 10 percentage points of GDP higher than before the COVID pandemic, representing an additional burden on public finances over an indefinite horizon, but debt service is just 6% of revenues based on current borrowing costs, a similar level to the post-2008 average.
- The credit assessor expects U.S. growth of 2.9% in 2022, with the economy slowing in the second half and into 2023; sees below-trend growth of 1.5% in 2023 and 1.3% in 2024.
- Annual average inflation forecasts have risen to 7.8% for 2022 and 3.7% for 2023.
- Sees Federal Reserve lifting its benchmark to around 3% by year end and 3.5% in the first quarter of 2023, then keeping it at this level through 2024.
