New York, November 23, 2011 -- The Aaa government bond rating for the United States is unaffected by the lack of a deficit reduction agreement by the Joint Select Committee on Deficit Reduction, Moody's Investors Services says, citing the $1.2 trillion in deficit reduction to come from automatic spending caps beginning in January 2013.

The lack of an agreement by the committee does not change the US fiscal outlook from what was legislated in the Budget Control Act of August 2, according to Moody's, echoing comments made on November 1. The rating agency said, however, that the committee outcome indicates that significant deficit reduction measures are unlikely to be adopted before the November 2012 elections. Moody's currently has a negative outlook on the US rating given the need over time for further deficit reduction to reverse the country's upward debt trajectory.

The Budget Control Act included about $900 billion in deficit reduction, to be followed by at least $1.2 trillion coming from either legislation proposed by the committee or automatic caps ("sequestration") on spending that become effective beginning in January 2013. Although the committee could have proposed considerably more than $1.2 trillion in deficit reduction measures, which would have been positive for the government's creditworthiness, its failure to do so does not decrease the amount of deficit reduction already legislated. While a change in the composition of the spending cuts would not be a major rating consideration, a reduction in the total amount that would increase the projected increase in federal debt over the coming decade could have negative rating implications. The sequestration measures that become effective in 2013 include about $1.0 trillion in spending cuts below what is currently projected, plus about $200 billion in interest savings because of lower debt levels. Of the spending cuts, about half would come from defense spending, with the majority of the remainder coming from discretionary spending programs but a portion from payments to Medicare providers and insurance plans. Some members of Congress appear to favor changing the mix of these spending cuts to lessen the impact on defense spending.

Moody's believes that over time further deficit reduction measures will be necessary to reverse the upward debt trajectory -- the principal reason behind the negative rating outlook assigned on August 2. While the committee outcome does not directly affect the fiscal outlook, it lowers the probability that further deficit reduction measures will be adopted before the November 2012 elections.

Without further measures, one of the most important medium-term questions concerning the fiscal outlook is the level of personal income tax rates beginning in 2013. The so-called "Bush tax cuts" will expire at the end of 2012, meaning that tax revenues will rise significantly at that time if there is no change in the law. If this indeed occurs, the upward trend in the ratio of federal debt to GDP could well be reversed in the middle of the decade, assuming that economic growth is maintained at a moderate rate. Over the longer term, entitlement programs are also crucial to the fiscal outlook.

In the short term, the committee outcome may also have implications for other fiscal measures that would affect the deficit and debt levels in 2012, because the same divisions that prevented a deficit agreement may continue to affect the legislative environment. Other potential measures include an extension of the temporary payroll tax reduction and extended unemployment benefits, which expire at the end of this year. The administration has proposed extending these measures through 2012, which would increase the budget deficit in the coming year but not the long-term debt trajectory. An increase in payroll taxes and a reduction in unemployment benefits next year could have an important effect on economic growth because of the effect on personal consumption expenditure, which in recent months has shown some strengthening. Lower economic growth would affect overall government revenues.