Fiscal Policy in America

Standard and Poor's recently downgraded its outlook (from stable to negative) on the United State's AAA credit rating for the first time in its history. Historically this means that there is a 1 n 3 chance that the downgrade in outlook will result in an actual downgrade. The position of US Treasury bonds play a crucial role in financial markets, being the predominant risk-free asset out there. The chances are the US debt will not be downgraded, S&P merely wanting to give the US policymakers a kick up the ass (and a nice bit of publicity for themselves).

Fiscal policy is conducted in a different fashion over in the US than it is done over here in Ireland or the UK. Over here, the finance minister prepares the budget within the government ,walks into the Parliament and commits the budget to the house (complete with calls to patriotic action.) The house then votes on it, and normally passes it with the government majority.

Over in the US it is the houses (House of Representatives and the Senate) that have the power over budget matters. It is not the Treasury Secretary that draws up the budget and presents it as a fait acompli, but the President and the houses of Parliament (and the congressmen and senators within them) who come up with the US budget. With a whip system that is more relaxed (Republicans and Democrats sometimes "cross the floor" for votes) and an upper house that is not a rubber stamp for the lower house, haggling over the budget and fiscal policy is a staple of American politics. And I love it. But, obviously, the guys at S&P don't appreciate the drama of all this, instead deciding that the squabbling puts the US's ability to repay its debts into question. Killjoys.

The current fiscal battle in the US has began to hot up in recent weeks with the Republicans' main man in this area, Congressman Paul Ryan, and President Obama both outlining their plan's to solve the US's deficit problems. Congressman Ryan drew the battle lines when he presented his longer term plan to get the deficit under control on April 5th. This forced Obama' hand, which came on April 13th. Both claimed to get serious on the deficit, but by partisanly different ways.

• Ryan's plan would cut the projected deficit by $4.4 trillion. Obama plans to cut the deficit by $4trillion over 12 years.


• Ryan wants to cut taxes, Obama to raise them by $1trillion.


• Ryan would take a scalpel to the health care budget, by making the states pay more in the case of Medicaid (for the poor) and the elderly pay more in the case of Medicare (for the elderly).


• Obama wants to cut military spending, something the Republicans won't countenance.

A standoff has ensued.

This standoff will continue as the date for the approval of an increase to the debt ceiling comes closer. In the 1990s this standoff over raising the debt ceiling (Republicans against and the Democrats for) led to a government shutdown, with non-essential government services suspended as the policymakers fought over the budget and the debt ceiling. President Clinton won and the debt ceiling was raised. Will policymakers let things get that far again?

Dramatic stuff indeed.