Fitch, one of the big three rating agencies, on Tuesday dropped the credit rating to AA+, down one notch from the highest rating AAA.
The lower credit rating, which provides investors with a guide of the risks associated with investing in the debt of a particular country, could over time raise borrowing costs for the US government.
The downgrade comes after Democrats and Republicans in June reached an agreement to avoid a debt default by raising the $31.4 trillion borrowing limit after months of political wrangling over taxes and spending.
The last-minute deal to raise the limit came after Republicans used the issue as a bargaining chip to pressure President Joe Biden into cutting spending for Democratic policy priorities.
Fitch cited growing polarisation around spending and tax policy, resulting in “repeated debt limit standoffs and last-minute resolutions”, as a key rationale for the downgrade.
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” Fitch said in a statement on Tuesday.
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” the rating agency added.
Fitch also pointed to Washington’s lack of a “medium-term fiscal framework” and “limited progress” in addressing challenges arising from rising social security and Medicare costs due to the ageing population.
The Associated Press, citing an unnamed person familiar with the situation, reported that Fitch told Biden administration officials that the January 6, 2021 riot at the Capitol was also a factor in the downgrade.
Fitch’s move, which follows warnings of a possible downgrade in May, marks just the second cut to the US’s credit rating in its history.
Standard & Poor’s stripped the world’s largest economy of its AAA rating in 2011 after a prolonged standoff over the debt ceiling, which raised the Treasury’s borrowing costs that year by an estimated $1.3bn.
Biden administration officials strongly criticised the rating cut.
Treasury Secretary Janet Yellen said the decision was “arbitrary” and based on outdated information.
“Many of these measures, including those related to governance, have shown improvement over the course of this Administration, with the passage of bipartisan legislation to address the debt limit, investment in infrastructure and make other investments in America’s competitiveness,” Yellen said.
“Fitch’s decision does not change what Americans, investors and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”
White House Press Secretary Karine Jean-Pierre said Fitch’s decision “defies reality” when the US had the “strongest recovery of any major economy in the world”, while accusing Republicans of being a threat to the economy.