US warned tax law could threaten credit rating (AFP)

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WASHINGTON (AFP) – Ratings agency Moody’s on Monday warned the United States will put its top level credit rating at risk if Congress extends a sweeping package of tax cuts and unemployment spending.

As the hotly-contested package was being considered by Congress, Moody’s said passage would lift the odds of a potentially damaging credit outlook revision.

“Unless there are offsetting measures, the package will be credit negative for the US and increase the likelihood of a negative outlook on the US government’s Aaa rating during the next two years,” said Moody’s Steven Hess.

The threatened outlook revision would be one step short of a full downgrade, but could nonetheless rock global financial markets and see Washington’s cost of borrowing soar.

The tax deal would extend by two years a series of massive tax cuts enacted in 2001 and 2003 under president George W. Bush with a built-in January 1, 2011 expiration date, and would provide an extension of jobless benefits.

The overall cost of the plan as currently configured runs to nearly 858 billion dollars over 10 years, according to congressional experts.

US President Barack Obama, wedged between painfully high unemployment and a soaring deficit, has argued that growth will be a key part of cutting the deficit.

Hess agreed that the measures to cut Social Security payroll taxes and extending jobless benefits for the long-term unemployed would help the tepid economic recovery, but the measures would add to the deficit.

“It will boost economic growth in the next two years, but adversely affect the federal government budget deficit and debt level,” Hess wrote.

He stressed that from a credit perspective, “the negative effects on government finance are likely to outweigh the positive effects of higher economic growth.”

“Higher economic growth should have a positive effect on government revenues and reduce payments related to unemployment,” he said.

“However, the magnitude of this positive effect will be considerably less than the foregone revenue and increased benefit expenditure, resulting in substantially higher budget deficits than would have otherwise been the case.”

Amid financial chaos in Europe — sparked by fears over high levels of government debt — the United States has taken the first tentative steps toward putting its fiscal house in order.

Earlier this month a presidential panel proposed fierce spending cuts and a tax overhaul to save four trillion dollars.

Amid fiscal crises that have rocked Greece and Ireland and threaten to engulf larger eurozone economies, the panel warned “we cannot play games or put off hard choices any longer.”

Some now fear that the deepening eurozone crisis could eventually spread to the United States, which has similar levels of debt as some European nations but which is insulated by its status as an economic superpower.

But amid a deeply partisan political battle in Washington, unpopular measures to tackle revenue and spending imbalances are unlikely to come quickly.

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