TEXT-S&P: fiscal cliff deal will not affect U.S. outlook
Jan 2 - While Congressional compromise designed to avoid the "fiscal cliff" may support the still-fragile U.S. economic rebound, the compromise doesn't affect our view of the country's credit outlook, given that we believe yesterday's agreement does little to place the U.S.'s medium-term public finances on a more sustainable footing. On Aug. 5, 2011, Standard & Poor's Ratings Services' lowered its long-term rating on the U.S. federal government to 'AA+' and assigned a negative outlook to that rating, reflecting in part our view at the time that Washington's governance and policymaking had become less stable, less effective, and less predictable. We believe that this characterization still holds. Under the deal, taxes would rise for individuals making $400,000 or more annually and households earning $450,000--with new limits on exemptions and deductions for the wealthiest Americans. The compromise also extends unemployment benefits for approximately 2 million American workers, increases the taxes paid on inheritances of estates worth $5 million or more to 40% from 35%, and prevents cuts in payments to doctors who treat Medicare patients. Still, the agreement may add to the federal deficit by hundreds of billions of dollars by extending most of the tax cuts previously implemented by Congress. In our view, the fiscal cliff has always been more of a slope--one that the country, in many ways, has been on for some time, with businesses curbing investments and financial markets advancing and retreating in reaction to news both good and bad. We maintain our forecast for U.S. GDP growth of 2.2% this year, climbing to 2.7% in 2014. Our base case already assumes an outcome roughly in line with yesterday's compromise. Now that a deal has been finalized, which in our view substantially mitigates an immediate source of policy-induced recession risk, we've reduced our assessment of the risk of another recession in the next 12 months to 10%-15% from 15%-20% (with more weight placed on the lower end of the range). FISCAL "CLOUD" PERSISTS FOR STATE AND LOCAL GOVERNMENTS We cited the economy as the key credit driver in our recent credit outlook for state and local governments (see "The Economy Looms Large
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