Moody’s Says Tax Rates Won’t Lead to U.S. Downgrade

Moody’s Investors Service Inc. said an extension of the Bush-era tax cuts agreed upon by President Barack Obama won’t lead to a downgrade of the nation’s Aaa credit rating.

“The extension of the current tax rates is for a temporary period of two years and we think that if that’s all there is to it -- it does not have ratings implications,” Steven Hess, senior credit officer at Moody’s in New York, said in an interview today. “We have a stable outlook. We don’t feel it will get changed downward in the next year or two.”

Obama announced yesterday he’ll accept a deal that would extend current tax rates for high-income taxpayers for two more years in exchange for extending federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year.

“We think it will be positive for economic growth in 2011 and 2012,” Hess said.

“That helps government revenue growth. However, it will not nearly offset the reduction in revenues coming from these measures and therefore it’s a negative for government finance if nothing else is done,” he said. “It would not be favorable for any effort to reduce the deficit and reverse the debt trajectory.”

Permanent Cuts

The U.S. economy grew at a 2.5 percent annual rate in the third quarter, compared with a 1.7 percent rate in the second quarter and 3.7 percent in the first three months of 2010, a Commerce Department report showed Nov. 23. The Federal deficit totaled $1.3 trillion in the fiscal year that ended Sept. 30, according to the Congressional Budget Office.

“We are not sure that there will be other reforms while this temporary extension is in place,” Hess said. “If no other measures are taken and if the tax cuts are made permanent, we would certainly see rising fiscal pressure. That wouldn’t necessarily lead to a rating action, but the pressure on the rating would be more than it would be otherwise.”

Last week, President Obama’s 18-member debt commission failed to produce the 14 votes needed to approve a $3.8 trillion budget-cutting plan that was expected to balance the government’s books by 2035.

The plan would have trimmed Social Security and Medicare costs, reduced income-tax rates, increased the gasoline tax and eliminated tax breaks, including the mortgage-interest deduction, among other measures. It would have reduced the annual deficit from $1.3 trillion this year to about $400 billion by 2015 and lead to reducing the $13.7 trillion national debt.

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