WASHINGTON (Reuters) - President Barack Obama’s plan to tame U.S. budget deficits probably relies too much on ending wars and too little on tackling health care spending to impress Wall Street credit rating agencies.
The United States is struggling to recover from a burst housing bubble and deep recession that ravaged public finances and led credit rating agency Standard & Poor’s to strip the nation of its gold-plated AAA credit rating last month.
An aging population will strain public finances further in coming years, consuming more healthcare and pension benefits offered by the federal government. In its downgrade, S&P said funding those future outlays was “key to long-term fiscal sustainability.”
But less than a tenth of the savings in Obama’s plan to cut budget deficits by $3.6 trillion would come from health spending. Reforms to the Social Security pension program were left out altogether.
In contrast, winding down wars in Iraq and Afghanistan, which give only one-off savings, account for a nearly one-third of the plan.
“If I were S&P, I would not change my rating on the basis of this proposal,” said Rudolph Penner, a former director of the Congressional Budget Office.
Analysts at Standard & Poor’s and Moody’s Investors Service, two of Wall Street’s three large ratings agencies, declined to comment on Obama’s plan. The third agency, Fitch, did not return calls seeking comment.
The rating downgrade by S&P helped crystallize the view that the country faces a decline as a global economic power.
After a spending battle in Congress that nearly left the country unable to its bills, S&P said last month it was also irked by Washington’s refusal to go beyond “minor policy changes” in the country’s main health program known as Medicare.
In the plan Obama unveiled on Monday, the projected healthcare savings amount to just $320 billion through 2021. Much of this is within the Medicare program, but mostly through cuts in payments to care providers, not structural reform.
“It’s hard to see how Medicare is even fixable under the current structure,” said Davis Wyss, who was chief economist at S&P until earlier this year and is now a visiting scholar at Brown University.
Obama’s proposal, which will serve as a recommendation for a congressional panel charged with finding at least $1.2 trillion in budget savings, is “a good-sized downpayment on what needs to be done, but the Medicare fix is still critical,” Wyss said.
Under current law, federal spending on healthcare programs and Social Security will likely rise from about 10 percent of gross domestic product to 15 percent in 25 years. Much of that is because of an aging population.
Without big tax hikes, those outlays would have to be funded by borrowing. And even if Obama were to win approval of his proposals to boost taxes — a big “if” given Republican opposition — it’s not clear the president’s plan would bring down debt levels enough to please S&P.
“Wherever it would land (the ratio of publicly held debt to GDP) would be well above 70 percent ... and in all likelihood not enough to reassure markets or credit rating agencies,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Banking on $1 trillion in savings from drawing down the U.S. military presence in Iraq and Afghanistan also undermines the credibility of the plan in the eyes of some experts because those spending cuts were probably going to happen anyway.
“It’s not real reform, and so you really need to do more substantive things that have a longer-term impact,” said David Walker, a former U.S. comptroller general who has been outspoken on the need to tighten the nation’s belt.
“They’re going to have to do more credible things.”
Additional reporting by Walter Brandimarte in New York; Editing by Padraic Cassidy